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Item 2. Management’s Discussion and Analysis

2022-08-04 compared with 2022-05-04 · 429 added, 265 removed, 565 unchanged (55% of the section changed)

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(2) the impact of changes in interest rates;

(3) a decline in economic conditions in the Central Valley and the Greater Sacramento Region;

(3) a decline in economic conditions in the Central Valley and the Greater Sacramento Region, including the impact of inflation;

(4) the Company’s ability to continue its internal growth at historical rates;

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(13) political developments, uncertainties or instability, catastrophic events, acts of war or terrorism, or natural disasters, such as earthquakes, drought, pandemic diseases or extreme weather events, any of which may affect services we use or affect our customers, employees or third parties with which we conduct business;

(14) the uncertainties related to the Covid-19 pandemic including, but not limited to, the potential adverse effect of the pandemic on the economy, our employees and customers, and our financial performance;

and (15) the impact of the federal CARES Act and the significant additional lending activities undertaken by the Company in connection with the Small Business Administration’s Paycheck Protection Program enacted thereunder, including risks to the Company with respect to the uncertain application by the Small Business Administration of new borrower and loan eligibility, forgiveness and audit criteria.

(14) the other risks set forth in the Company’s reports filed with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2021.

Therefore, the information set forth in such forward-looking statements should be carefully considered when evaluating the business prospects of the Company.

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Such statements are not guarantees of performance and are subject to certain risks, uncertainties and assumptions, including those described in this Quarterly Report on Form 10-Q.

Should one or more of these risks or

uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected, projected, intended, committed or believed.

Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected, projected, intended, committed or believed.

The future results and shareholder values of the Company may differ materially from those expressed in these forward-looking statements.

Many of the factors that will determine these results and values are beyond the Company’s ability to control or predict.

For those statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

The Securities and Exchange Commission (SEC) maintains a web site which contains reports, proxy statements, and other information pertaining to registrants that file electronically with the SEC, including the Company.

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We believe that the Company’s most critical accounting policies are those which the Company’s financial condition depends upon, and which involve the most complex or subjective decisions or assessments.

There have been no material changes to the Company’s critical accounting policies during the three months ended March 31, 2022.

There have been no material changes to the Company’s critical accounting policies during the six months ended June 30, 2022.

Please refer to the Company’s 2021 Annual Report to Shareholders on Form 10-K for a complete listing of critical accounting policies.

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Dividend Declared

On April 20, 2022, the Board of Directors declared a $0.12 per share cash dividend payable on May 20, 2022 to shareholders of record as of May 6, 2022.

On July 20, 2022, the Board of Directors declared a $0.12 per share cash dividend payable on August 20, 2022 to shareholders of record as of August 5, 2022.

Economic Conditions

The COVID-19 pandemic has caused significant, unprecedented disruption around the world that has affected daily living and negatively impacted the local, state, national and global economies.

It has caused significant economic and financial disruption that have adversely affected or otherwise impacted our businesses.

The COVID-19 has not yet been globally contained and the number of cases continues to increase in many locations, including in the United States in which we operate.

During the course of the continuing pandemic, there have been varying governmental and other responses to slow or control the spread of the COVID-19 and to mitigate the adverse impact of the COVID-19, such as stay at home orders, restrictions on business activities, health and safety guidelines, economic relief for individuals and businesses, and monetary policy measures, such responses have met varying degrees of success, and it remains uncertain whether these actions will be successful in a sustained manner.

We cannot predict at this time the scope and duration of the pandemic.

Despite the continuing challenges in recent months, there has been some improvement in the economic environment and resilience in the markets in which we operate.

With the seemingly wider availability and distribution of vaccinations and the easing of some restrictions in the United States, we have seen steps towards broader containment.

However, there still remains much uncertainty around containment of the pandemic, which will depend on various factors, including but not limited to, the extent and spread of variants of the virus;

efficacy of vaccines;

and government and other actions to mitigate the spread of COVID-19.

Through the COVID-19 pandemic, the Company was able to react quickly to these changes because of the commitment and flexibility of its workforce coupled with a well-prepared business continuity plan.

The Company has taken various steps to help our customers, employees, and communities, while maintaining safe and sound banking operations.

The Company has been assisting customers with loan deferrals and the PPP loans and has provided employees remote working environment while maintaining fully functioning operations in all areas.

Agriculture and agricultural-related businesses remain a critical part of the Central Valley’s economy.

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We closely monitor the water resources and the related issues affecting our customers, and we will remain vigilant for identifying signs of deterioration within the loan portfolio in an effort to manage cred it quality and work with borrowers where possible to mitigate any losses.

First Quarter of 2022

For the first quarter of 2022, our consolidated net income was $6,086,000 compared to $7,479,000 for the same period in 2021.

Diluted EPS was $0.51 for the quarter ended March 31, 2022 compared to $0.60 for the same period in 2021.

The decrease in net income during the first quarter of 2022 compared to the same period in 2021 is primarily driven by no reversal of provision for credit losses, a decrease in loan placement fees of $358,000, a decrease in non-interest income of $165,000, and an increase in total non-interest expenses of $57,000, partially offset by a decrease in the provision for income taxes of $587,000, an increase in interchange fees of $72,000, an increase in net realized gains on sales and calls of investment securities of $206,000, an increase in service charge income of $107,000, and an increase in net interest income of $42,000.

During the quarter ended March 31, 2022, the Company recorded no provision for credit losses, compared to a $1,800,000 reversal of provision during the quarter ended March 31, 2021.

Throughout 2020, 2021 and the first three months of 2022, we adjusted the economic risk factor methodology to incorporate the current economic implications from the COVID-19 pandemic.

Net interest margin (fully tax equivalent basis) decreased to 3.19% for the quarter ended March 31, 2022 compared to 3.76% for the same period in 2021.

The net interest margin period-to-period comparisons were impacted by the decrease in the yield on the average investment securities, including interest-earning deposits in other banks and Federal funds sold, by the decrease in the yield on the loan portfolio and the increase in the cost of total interest-bearing liabilities.

The effective yield on average investment securities, including interest-earning deposits in other banks and Federal funds sold, decreased to 2.02% for the three months ended March 31, 2022, compared to 2.07% for the three months ended March 31, 2021.

The effective yield on average loans decreased to 4.85% for the three months ended March 31, 2022, compared to 5.18% for the three months ended March 31, 2021.

Total average PPP loans, which have an annual interest rate of 1.00%, were $11,329,000 and $178,956,000 for the three months ended March 31, 2022 and 2021, respectively.

Excluding PPP loans from total average loans, the effective yield on average loans for the three months ended March 31, 2022 and 2021 was 4.87% and 5.11%, respectively.

The cost of deposits (calculated by dividing annualized interest expense on interest bearing deposits by total deposits), decreased to 0.05% for the quarter ended March 31, 2022 compared to 0.06% for the same period in 2021.

Non-interest income decreased $165,000 or 8.25% to $1,834,000 for the quarter ended March 31, 2022 compared to $1,999,000 for the same period in 2021, primarily driven by a decrease in loan placement fees of $358,000, and a decrease of $276,000 in other income, offset by an increase of $206,000 in net realized gains on sales and calls of investment securities, an increase in service charge income of $107,000, an increase in interchange fees of $72,000, an increase in appreciation in cash surrender value of bank owned life insurance of $69,000, and an increase in Federal Home Loan Bank (“FHLB”) dividends of $15,000.

Non-interest expense for the quarter ended March 31, 2022 increased $57,000 or 0.50% from the comparable period due to increases in salaries and employee benefits, occupancy and equipment, professional services, regulatory assessments, appraisal fees, alarm monitoring, information technology expenses, risk management expenses, donations, education and training, directors’ expenses, telephone expenses, mileage and travel, loan related expenses, advertising, and amortization of software, partially offset by decreases in data processing, tax provision, personnel, internet banking expenses, amortization of core deposit intangibles, ATM/debit card expenses, postage, armored courier fees, stationery and supplies, check printing, and operating losses.

Annualized return on average equity (ROE) for the first quarter of 2022 decreased to 10.51% compared to 12.17% for the same period in 2021.

The decrease in ROE reflects the decrease in net income, notwithstanding the decrease in average shareholders’ equity compared to the prior year.

Annualized return on average assets (ROA) was 0.99% and 1.42% for the quarters ended March 31, 2022 and 2021, respectively.

Total average equity decreased to $231,706,000 for the first quarter of 2022 compared to $245,913,000 for the first quarter of 2021.

The Company declared and paid $0.12 per share in cash dividends to holders of common stock during the first quarter of 2022, compared to $0.11 in dividends declared and paid during the first quarter of 2021.

Our average total assets increased $355,948,000 or 16.92% to $2,460,025,000 during the first quarter of 2022 compared to the same period in 2021.

Total average interest-earning assets increased $351,388,000 or 18.17% in the first quarter of 2022 compared to the same period of 2021.

Total average loans, including nonaccrual loans, decreased $63,163,000 or 5.84% in the first quarter of 2022 compared to the same period in 2021.

Average total investments and interest-earning deposits in other banks increased $411,248,000 or 48.01% in the quarter ended March 31, 2022 compared to the same period in 2021.

Average interest-bearing liabilities increased $266,395,000 or 27.13% in the quarter ended March 31, 2022 compared to the same period in 2021.

Average non-interest bearing demand deposits increased 11.35% to $940,963,000 in the first quarter of 2022 compared to $845,065,000 during the same period in 2021.

The ratio of average non-interest bearing demand deposits to average total deposits was 43.77% in the first quarter of 2022 compared to 46.39% in 2021.

As a whole the loan portfolio may be subject to the impact of changes in interest rates, a decline in economic conditions in the Central Valley and the Greater Sacramento Region, and inflation.

Second Quarter of 2022

For the second quarter of 2022, our consolidated net income was $6,542,000 compared to $7,563,000 for the same period in 2021.

Diluted EPS was $0.56 for the quarter ended June 30, 2022 compared to $0.60 for the same period in 2021.

The decrease in net income during the second quarter of 2022 compared to the same period in 2021 is primarily driven by no provision for credit losses, an increase in net realized losses on sales and calls of investment securities of $890,000, a decrease in loan placement fees of $242,000, a decrease in non-interest income of $1,307,000, and an increase in total non-interest expenses of $453,000, partially offset by an increase in net interest income of $1,729,000.

During the quarter ended June 30, 2022, the Company recorded no provision for credit losses, compared to a $1,500,000 reversal of provision during the quarter ended June 30, 2021.

Throughout 2020, 2021 and the first six months of 2022, the Company adjusted the economic risk factor methodology to incorporate the current economic implications from the COVID-19 pandemic.

Net interest margin (fully tax equivalent basis) decreased to 3.48% for the quarter ended June 30, 2022 compared to 3.60% for the same period in 2021.

Net interest income, before provision for credit losses, increased $1,729,000, or 9.56%, to $19,810,000 for the second quarter of 2022, compared to $18,081,000 for the same period in 2021.

The net interest margin period-to-period comparisons were impacted by the increase in the yield on the average investment securities, including interest-earning deposits in other banks and Federal funds sold, offset by the decrease in the yield on the loan portfolio.

The effective yield on average investment securities, including interest-earning deposits in other banks and Federal funds sold, increased to 2.58% for the three months ended June 30, 2022, compared to 2.11% for the three months ended June 30, 2021.

The effective yield on average loans decreased to 4.76% for the three months ended June 30, 2022, compared to 5.04% for the three months ended June 30, 2021.

Total average PPP loans, which have an annual interest rate of 1.00%, were $2,358,000 and $158,490,000 for the three months ended June 30, 2022 and 2021, respectively.

Excluding PPP loans from total average loans, the effective yield on average loans for the three months ended June 30, 2022 and 2021 was 4.78% and 4.86%, respectively.

The cost of deposits (calculated by dividing annualized interest expense on interest bearing deposits by total deposits), decreased to 0.04% for the quarter ended June 30, 2022 compared to 0.05% for the same period in 2021.

Non-interest income decreased $1,307,000 or 62.93% to $770,000 for the quarter ended June 30, 2022 compared to $2,077,000 for the same period in 2021, primarily driven by an increase of $890,000 in net realized losses on sales and calls of investment securities, a decrease in loan placement fees of $242,000, and a decrease of $327,000 in other income, offset by a an increase in service charge income of $77,000, an increase in interchange fees of $7,000, and an increase in appreciation in cash surrender value of bank owned life insurance of $69,000.

Non-interest expense for the quarter ended June 30, 2022 increased $453,000 or 3.90% from the comparable period due to increases in salaries and employee benefits, occupancy and equipment, regulatory assessments, information technology expenses, risk management expenses, education and training, telephone expenses, mileage and travel, operating losses, loan related expenses, advertising, ATM/debit card expenses, postage, stationery and supplies, and check printing, partially offset by decreases in professional services, data processing, tax provision, personnel, internet banking expenses, appraisal fees, directors’ expenses, alarm monitoring, donations, amortization of core deposit intangibles, armored courier fees, and amortization of software.

Annualized return on average equity (ROE) for the second quarter of 2022 increased to 14.73% compared to 12.25% for the same period in 2021.

The increase in ROE reflects the decrease in average shareholders’ equity, notwithstanding the decrease in net income compared to the prior year.

Annualized return on average assets (ROA) was 1.07% and 1.36% for the quarters ended June 30, 2022 and 2021, respectively.

Total average equity decreased to $177,615,000 for the second quarter of 2022 compared to $246,959,000 for the second quarter of 2021.

The Company declared and paid $0.12 per share in cash dividends to holders of common stock during the second quarters of 2022 and 2021.

The change in shareholders’ equity was driven by the retention of earnings, net of dividends paid, the decrease in accumulated other comprehensive income (AOCI) , and share repurchases.

The Company’s average total assets increased $214,249,000 or 9.62% to $2,441,881,000 during the second quarter of 2022 compared to the same period in 2021.

Total average interest-earning assets increased $280,278,000 or 13.62% in the second quarter of 2022 compared to the same period of 2021.

Total average loans, including nonaccrual loans, increased $5,742,000 or 0.53% in the second quarter of 2022 compared to the same period in 2021.

Average total investments and interest-earning deposits in other banks increased $272,165,000 or 27.76% in the quarter ended June 30, 2022 compared to the same period in 2021.

Average interest-bearing liabilities increased $228,729,000 or 21.58% in the quarter ended June 30, 2022 compared to the same period in 2021.

Average non-interest bearing demand deposits increased 6.08% to $947,724,000 in the second quarter of 2022 compared to $893,441,000 during the same period in 2021.

The ratio of average non-interest bearing demand deposits to average total deposits was 43.92% in the second quarter of 2022 compared to 45.86% in 2021.

First Six Months of 2022

For the six months ended June 30, 2022, our consolidated net income was $12,628,000 compared to $15,042,000 for the same period in 2021.

Diluted EPS was $1.07 for the first six months of 2022 compared to $1.20 for the first six months of 2021.

Net income for the six-month period ended June 30, 2022 decreased 16.05%, compared to the six-month period ended June 30, 2021, primarily driven by an increase in net realized losses on sales and calls of investment securities, a decrease in loan placement fees, and an increase in non-interest expense, partially offset by an increase in net interest income, an increase in service charge income, and a decrease in provision for income taxes.

Net interest income before the provision for credit losses increased $1,771,000 or 4.97%.

The impact to interest income from the accretion of the loan marks on acquired loans was $324,000 and $349,000 for the six months ended June 30, 2022 and 2021, respectively.

Net interest income during the first six months of 2022 and 2021 benefited by approximately $440,000 and $434,000, respectively, in nonrecurring income from loan prepayment penalties.

Excluding the loan mark accretion and prepayment penalties, net interest income for the six months ended June 30, 2022, increased by $1,790,000 compared to the six-month period ended June 30, 2021.

Non-interest income decreased $1,472,000 or 36.11%, and non-interest expense increased $510,000 or 2.22% in the first six months of 2022 compared to the first six months of 2021.

During the six months ended June 30, 2022, the Company recorded no provision for credit losses of compared to a $3,300,000 reversal of provision during same period in 2021.

Net recoveries of previously charged-off loans totaling $273,000 and $824,000 were recorded during the six months ended June 30, 2022 and 2021, respectively.

Annualized return on average equity for the six months ended June 30, 2022 increased to 12.35% compared to 12.21% for the same period in 2021.

The increase in ROE reflects the decrease in average shareholders’ equity, notwithstanding the decrease in net income compared to the prior year.

Annualized return on average assets was 1.03% and 1.39% for the six months ended June 30, 2022 and 2021, respectively.

Total average equity decreased to $204,511,000 for the six months ended June 30, 2022 compared to $246,439,000 for the same period in 2021.

The change in shareholders’ equity was driven by the retention of earnings, net of dividends paid, the decrease in accumulated other comprehensive income (AOCI) , and share repurchases.

Our average total assets increased $284,707,000 or 13.14% in the first six months of 2022 compared to the same period in 2021.

Total average interest-earning assets increased $315,638,000 or 15.81% comparing the first six months of 2022 to the same period in 2021.

Average total loans, including nonaccrual loans, decreased $28,520,000 or 2.64% comparing the first six months of 2022 to the same period in 2021.

The effective yield on average loans decreased to 4.80% for the six months June 30, 2022, compared to 5.11% for the six months June 30, 2021.

Total average PPP loans were $6,820,000 and $169,553,000 for the six months ended June 30, 2022 and 2021 , respectively.

Excluding PPP loans from total average loans, the effective yield on average loans for the six months ended June 30, 2022 and 2021 was 4.78% and 5.34%, respectively.

Average total investments (securities and interest-earning deposits) increased $341,321,000, or 37.15% in the six-month period ended June 30, 2022 compared to the same period in 2021.

Average interest-bearing liabilities increased $247,458,000 or 24.24% on a period-to-period comparison.

Our net interest margin (fully tax equivalent basis) for the first six months ended June 30, 2022 decreased to 3.34% compared to 3.67% for the same period in 2021.

The decrease in net interest margin in the period-to-period comparison resulted primarily from a decrease in the yield on the loan portfolio, a decrease in the effective yield on interest-earning deposits in other banks and Federal funds sold, and an increase in the cost of total interest-bearing liabilities, partially offset by an increase in the effective yield on the Company’s average investment securities.

The effective yield on interest-earning assets decreased 28 basis points to 3.45% for the six-month period ended June 30, 2022 compared to 3.73% for the same period in 2021.

For the six-month period ended June 30, 2022, the effective yield on investment securities, including Federal funds sold and interest-earning deposits in other banks, increased 21 basis points, compared to the same period in the prior year, and the effective yield on loans decreased thirty-one basis points.

The cost of total interest-bearing liabilities increased 9 basis points to 0.20% compared to 0.11% for the same period in 2021.

The cost of total deposits, including noninterest bearing accounts decreased to 0.05% compared to 0.06% for the six months ended June 30, 2022 and 2021, respectively.

Net interest income before the reversal of provision for credit losses for the six months ended June 30, 2022 was $37,407,000 compared to $35,636,000 for the same period in 2021, an increase of $1,771,000 or 4.97%.

Net interest income

increased as a result of yield changes, and asset mix changes, offset by an increase in average earning assets and an increase in interest-bearing liabilities.

The Bank recovered $440,000 and $434,000, of foregone interest income and prepaid payment penalties in 2022 and 2021, respectively.

The impact to interest income from the accretion of the loan marks on acquired loans was $324,000 and $349,000 for the six months ended June 30, 2022 and 2021, respectively.

The Bank had non-accrual loans totaling $271,000 at June 30, 2022, compared to $946,000 at December 31, 2021 and $2,035,000 at June 30, 2021.

The Company had no other real estate owned or repossessed assets at June 30, 2022, December 31, 2021, or June 30, 2021.

At June 30, 2022, we had total net loans of $1,126,091,000, total assets of $2,353,592,000, total deposits of $2,105,997,000, and shareholders’ equity of $170,253,000.

Non-interest income was $2,604,000 for the six months ended June 30, 2022 compared to $4,076,000 for the same period in 2021.

The $1,472,000 or 36.11% decrease in non-interest income during the six months ended June 30, 2022 was primarily driven by a decrease in loan placement fees of $600,000, a decrease of $603,000 in other income, and an increase of $684,000 in net realized losses on sales and calls of investment securities, offset by an increase in service charge income of $184,000, an increase of $79,000 in interchange fees, an increase of $138,000 in appreciation in cash surrender value of bank-owned life insurance, and an increase in FHLB dividends of $14,000.

Key Factors in Evaluating Financial Condition and Operating Performance

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Our return to shareholders is determined in a ratio that measures the return on average equity (ROE), which is net income divided by average shareholders’ equity.

Our annualized ROE was 10.51% for the three months ended March 31, 2022 compared to 11.50% for the year ended December 31, 2021 and 12.17% for the three months ended March 31, 2021.

Our net income for the three months ended March 31, 2022 decreased $1,393,000 or 18.63% to $6,086,000 compared to $7,479,000 for the three months ended March 31, 2021, primarily driven by no reversal of provision for credit losses,a decrease in loan placement fees, a decrease in non-interest income, and an increase in total non-interest expenses, partially offset by a decrease in the provision for income taxes, an increase in interchange fees, an increase in net realized gains on sales and calls of investment securities, an increase in service charge income, and an increase in net interest income.

Net interest margin (NIM) decreased 57 basis points for the three-month period ended March 31, 2022 compared to the three months ended March 31, 2021.

Diluted EPS was $0.51 for the three months ended March 31, 2022 and $0.60 for the same period in 2021.

Our annualized ROE was 12.35% for the six months ended June 30, 2022 compared to 11.50% for the year ended December 31, 2021 and 12.21% for the six months ended June 30, 2021.

Our net income for the six months ended June 30, 2022 decreased $2,414,000 or 16.05% to $12,628,000 compared to $15,042,000 for the six months ended June 30, 2021, primarily driven by no reversal of provision for credit losses, an increase in net realized losses on sales and calls of investment securities, a decrease in loan placement fees, a decrease in non-interest income, and an increase in total non-interest expenses, partially offset by a decrease in the provision for income taxes, an increase in interchange fees, an increase in service charge income, and an increase in net interest income.

Net interest margin (NIM) decreased 33 basis points for the six-month period ended June 30, 2022 compared to the six months ended June 30, 2021.

Diluted EPS was $1.07 for the six months ended June 30, 2022 and $1.20 for the same period in 2021.

Return on Average Assets

Our return on average assets (ROA) is a ratio that we use to compare our performance with other banks and bank holding companies.

Our annualized ROA for the three months ended March 31, 2022 was 0.99% compared to 1.25% for the year ended December 31, 2021 and 1.42% for the three months ended March 31, 2021.

The decrease in ROA for the three months ended March 31, 2022 compared to March 31, 2021 was due to the decrease in net income.

Average assets for the three months ended March 31, 2022 was $2,460,025,000 compared to $2,267,615,000 for the year ended December 31, 2021.

Our annualized ROA for the six months ended June 30, 2022 was 1.03% compared to 1.25% for the year ended December 31, 2021 and 1.39% for the six months ended June 30, 2021.

The decrease in ROA for the six months ended June 30, 2022 compared to June 30, 2021 was due to the decrease in net income.

Average assets for the six months ended June 30, 2022 was $2,450,903,000 compared to $2,267,615,000 for the year ended December 31, 2021.

Median ROA for our peer group was 0.93% for the year ended December 31, 2021.

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Specifically, we have focused on net interest income through a variety of processes, including increases in average interest earning assets, and minimizing the effects of the recent interest rate changes on our net interest margin.

The Company’s net interest margin (fully tax equivalent basis) decreased to 3.19% for the three months ended March 31, 2022, compared to 3.76% for the same period in 2021.

The decrease in net interest margin in the period-over-period comparison resulted primarily from the decrease in the effective yield on average investment securities (including interest-earning deposits in other banks and Federal funds sold), the decrease in the yield on the Company’s loan portfolio, and the increase on the cost of interest bearing liabilities.

The Company’s net interest margin (fully tax equivalent basis) decreased to 3.34% for the six months ended June 30, 2022, compared to 3.67% for the same period in 2021.

The decrease in net interest margin in the period-over-period comparison resulted primarily from the increase in the effective yield on average investment securities (including interest-earning deposits in other banks and Federal funds sold), the decrease in the yield on the Company’s loan portfolio, and the increase on the cost of interest bearing liabilities.

Interest-bearing liabilities continue to benefit from low interest rates.

In comparing the two periods ending March 31, 2022 and 2021, the effective yield on total earning assets decreased 53 basis points, while the cost of total interest-bearing liabilities increased 7 basis points and the cost of total deposits decreased to 0.05% compared to 0.06%.

Net interest income before the reversal of provision for credit losses for the three-month period ended March 31, 2022 was $17,597,000 compared to $17,555,000 for the same period in 2021.

In comparing the two periods ending June 30, 2022 and 2021, the effective yield on total earning assets decreased 28 basis points, while the cost of total interest-bearing liabilities increased 9 basis points and the cost of total deposits decreased to 0.05% compared to 0.06%.

Net interest income before the reversal of provision for credit losses for the six-month period ended June 30, 2022 was $37,407,000 compared to $35,636,000 for the same period in 2021.

Our non-interest income generally consists of service charges and fees on deposit accounts, fee income from loan placements and other services, appreciation in cash surrender value of bank-owned life insurance, net gains from sales of investment securities, FHLB dividends, and other income.

Non-interest income for the three months ended March 31, 2022 decreased $165,000 or 8.25%, to $1,834,000 compared to $1,999,000 for the three months ended March 31, 2021.

The decrease resulted primarily from decreases in loan placement fees and other income, offset by increases in net realized gains on sales and calls of investment securities, service charge income, FHLB dividends;

and interchange fees, compared to the comparable 2021 period.

Non-interest income for the six months ended June 30, 2022 decreased $1,472,000 or 36.11%, to $2,604,000 compared to $4,076,000 for the six months ended June 30, 2021.

The decrease resulted primarily from decreases in loan placement fees, other income, and in net realized losses on sales and calls of investment securities, offset by increases in service charge income, FHLB dividends;

appreciation in cash surrender value of bank-owned life insurance, and interchange fees, compared to the comparable 2021 period.

Further detail of non-interest income is provided below.

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Asset quality is measured in terms of percentage of total loans and total assets and is a key element in estimating the future earnings of a company.

Total nonperforming assets were $292,000 and $946,000 at March 31, 2022 and December 31, 2021, respectively.

Nonperforming assets totaled 0.03% of gross loans as of March 31, 2022 and 0.09% of gross loans as of December 31, 2021.

The ratio of nonperforming assets to total assets was 0.01% as of March 31, 2022 and 0.04% as of December 31, 2021.

The nonperforming assets at March 31, 2022 and December 31, 2021 consisted of nonaccrual loans of $292,000 and $3,278,000, respectively.

The Company had no other real estate owned (OREO) or repossessed assets at March 31, 2022 or December 31, 2021.

Total nonperforming assets were $271,000 and $946,000 at June 30, 2022 and December 31, 2021, respectively.

Nonperforming assets totaled 0.02% of gross loans as of June 30, 2022 and 0.09% of gross loans as of December 31, 2021.

The ratio of nonperforming assets to total assets was 0.01% as of June 30, 2022 and 0.04% as of December 31, 2021.

The nonperforming assets at June 30, 2022 and December 31, 2021 consisted of nonaccrual loans of $271,000 and $946,000, respectively.

The Company had no other real estate owned (OREO) or repossessed assets at June 30, 2022 or December 31, 2021.

Management maintains certain loans that have been brought current by the borrower (less than 30 days delinquent) on nonaccrual status until such time as management has determined that the loans are likely to remain current in future periods.

The allowance for credit losses as a percentage of the outstanding loan balance was 0.97% as of March 31, 2022 and 0.92% as of December 31, 2021.

The ratio of net charge-off (recovery) to average loans was (0.10)% for the three months ended March 31, 2022 and (0.09)% as of December 31, 2021.

The allowance for credit losses as a percentage of the outstanding loan balance was 0.87% as of June 30, 2022 and 0.92% as of December 31, 2021.

The ratio of net charge-off (recovery) to average loans was (0.05)% for the six months ended June 30, 2022 and (0.09)% as of December 31, 2021.

As revenues from both net interest income and non-interest income are a function of asset size, the growth in assets has a direct impact in increasing net income and therefore ROE and ROA.

The majority of our assets are loans and investment securities, and the majority of our liabilities are deposits, and therefore the ability to generate deposits as a funding source for loans and investments is fundamental to our asset growth.

Total assets decreased by $27,109,000 or 1.11% during the three months ended March 31, 2022 to $2,423,030,000 compared to $2,450,139,000 as of December 31, 2021.

Total gross loans decreased by 2.61% or $27,069,000 to $1,012,042,000 as of March 31, 2022 compared to $1,039,111,000 as of December 31, 2021.

The gross loan decrease consisted of a decrease of $14,999,000 in the PPP loans, as well as a decrease of $12,070,000 in non-PPP loan growth.

Total deposits increased 1.86% to $2,162,360,000 as of March 31, 2022 compared to $2,122,797,000 as of

December 31, 2021.

The Company’s deposit balances for the three months ended March 31, 2022 increased through organic growth.

Our loan-to-deposit ratio at March 31, 2022 was 46.80% compared to 48.95% at December 31, 2021.

Total assets decreased by $96,547,000 or 3.94% during the six months ended June 30, 2022 to $2,353,592,000 compared to $2,450,139,000 as of December 31, 2021.

Total gross loans increased by 9.32% or $96,853,000 to $1,135,964,000 as of June 30, 2022 compared to $1,039,111,000 as of December 31, 2021.

The gross loan increase consisted of a decrease of $17,416,000 in the PPP loans, and an increase of $114,269,000 in non-PPP loan growth.

Total deposits decreased 0.79% to $2,105,997,000 as of June 30, 2022 compared to $2,122,797,000 as of December 31, 2021.

The Company’s deposit balances for the six months ended June 30, 2022 increased through organic growth.

Our loan-to-deposit ratio at June 30, 2022 was 53.94% compared to 48.95% at December 31, 2021.

The loan-to-deposit ratio of our peers was 71.00% at December 31, 2021.

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As of August 30, 2018, bank holding companies with consolidated assets of less than $3 billion and banks like Central Valley Community Bank became subject to new capital requirements, and certain provisions of the new rules were phased in through 2019 under the Dodd-Frank Act and Basel III.

As of March 31, 2022, the Bank met or exceeded all regulatory capital requirements inclusive of the capital buffer.

The Bank’s capital ratios exceeded the regulatory guidelines for a well-capitalized financial institution under the Basel III regulatory requirements at March 31, 2022.

As of June 30, 2022, the Bank met or exceeded all regulatory capital requirements inclusive of the capital buffer.

The Bank’s capital ratios exceeded the regulatory guidelines for a well-capitalized financial institution under the Basel III regulatory requirements at June 30, 2022.

The Company’s regulatory capital ratios are presented in the table in the “Capital” section below.

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When measuring operating efficiency, a lower ratio is more favorable.

The Company’s efficiency ratio (operating expenses, excluding amortization of intangibles and foreclosed property expense, divided by net interest income before provision for credit losses (computed on a tax equivalent basis) plus non-interest income, excluding gains and losses from sales of securities and OREO, and gains related to the collection of life insurance proceeds) was 57.66% for the three months ended March 31, 2022 compared to 56.34% for the three months ended March 31, 2021.

The Company’s efficiency ratio (operating expenses, excluding amortization of intangibles and foreclosed property expense, divided by net interest income before provision for credit losses (computed on a tax equivalent basis) plus non-interest income, excluding gains and losses from sales of securities and OREO, and gains related to the collection of life insurance proceeds) was 55.82% for the six months ended June 30, 2022 compared to 55.96% for the six months ended June 30, 2021.

The deterioration in the efficiency ratio was due to the decrease in non-interest income outpacing the increase in non-interest expense.

Further discussion of the change in net interest income and increase in operating expenses is below.

The Company’s net interest income before provision for credit losses on a non tax-equivalent basis plus non-interest income, net of investment securities related gains, decreased 1.49% to $19,608,000 for the first three months of 2022 compared to $19,904,000 for the same period in 2021, while operating expenses, net of losses on sale of assets, and amortization of core deposit intangibles, increased 0.81% to $11,305,000 from $11,214,000 for the same period in 2021.

The Company’s net interest income before provision for credit losses on a non tax-equivalent basis plus non-interest income, net of investment securities related gains, increased 2.79% to $41,645,000 for the first six months of 2022 compared to $40,516,000 for the same period in 2021, while operating expenses, net of losses on sale of assets, and amortization of core deposit intangibles, increased 2.55% to $23,248,000 from $22,671,000 for the same period in 2021.

Liquidity management involves the Bank’s ability to meet cash flow requirements arising from fluctuations in deposit levels and demands of daily operations, which include providing for customers’ credit needs, funding of securities purchases, and ongoing repayment of borrowings.

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Primary uses of funds include origination and purchases of loans, withdrawals of and interest payments on deposits, purchases of investment securities, and payment of operating expenses.

We had liquid assets (cash and due from banks, interest-earning deposits in other banks, Federal funds sold, available-for-sale securities, and equity securities) totaling $1,257,664,000 or 51.90% of total assets at March 31, 2022 and $1,280,091,000 or 52.25% of total assets as of December 31, 2021.

We had liquid assets (cash and due from banks, interest-earning deposits in other banks, Federal funds sold, available-for-sale securities, and equity securities) totaling $744,546,000 or 31.63% of total assets at June 30, 2022 and $1,280,091,000 or 52.25% of total assets as of December 31, 2021.

RESULTS OF OPERATIONS

Net Income for the Three Months Ended March 31, 2022 Compared to the Three Months Ended March 31, 2021

Net income decreased to $6,086,000 for the three months ended March 31, 2022 compared to $7,479,000 for the three months ended March 31, 2021.

Basic and diluted earnings per share for March 31, 2022 were $0.51 and $0.51, respectively.

Net Income for the Six Months Ended June 30, 2022 Compared to the Six Months Ended June 30, 2021

Net income decreased to $12,628,000 for the six months ended June 30, 2022 compared to $15,042,000 for the six months ended June 30, 2021.

Basic and diluted earnings per share for June 30, 2022 were $1.08 and $1.07, respectively.

Basic and diluted earnings per share for the same period in 2021 were $1.20 and $1.20, respectively.

Annualized ROE was 10.51% for the three months ended March 31, 2022 compared to 12.17% for the three months ended March 31, 2021.

Annualized ROA for the three months ended March 31, 2022 and 2021 was 0.99% and 1.42%, respectively.

The decrease in net income for the three months ended March 31, 2022 compared to the same period in 2021 was primarily driven by an increase in non-interest expense, no reversal of provision for credit losses, and a decrease in loan placement fees, partially offset by an increase in net interest income, an increase in net realized gains on sales and calls of investment securities, a decrease in provision for income taxes, and an increase in service charge income.

During the three months ended March 31, 2022, the Company recorded no reversal of provision for credit losses, compared to a $1,800,000 reversal of provision during the three months ended March 31, 2021.

The reversal of provision for credit losses resulted from our assessment of the overall adequacy of the allowance for credit losses considering a number of factors as discussed in the “Allowance for Credit Losses” section.

During the three months ended March 31, 2022, the Company adjusted the economic risk factor methodology to incorporate the current economic implications from the COVID-19 pandemic as well as the continuing labor shortage and ongoing supply chain disruptions.

Annualized ROE was 12.35% for the six months ended June 30, 2022 compared to 12.21% for the six months ended June 30, 2021.

Annualized ROA for the six months ended June 30, 2022 and 2021 was 1.03% and 1.39%, respectively.

The decrease in net income for the six months ended June 30, 2022 compared to the same period in 2021 was primarily driven by an increase in non-interest expense, no reversal of provision for credit losses, an increase in net realized losses on sales and calls of investment securities, and a decrease in loan placement fees, partially offset by an increase in net interest income, a decrease in provision for income taxes, and an increase in service charge income.

During the six months ended June 30, 2022, the Company recorded no provision for credit losses, compared to a $3,300,000 reversal of provision during the six months ended June 30, 2021.

The lack of provision for credit losses resulted from our assessment of the overall adequacy of the allowance for credit losses considering a number of factors as discussed in the “Allowance for Credit Losses” section.

During the six months ended June 30, 2022, the Company adjusted the economic risk factor methodology to incorporate the current economic implications from the COVID-19 pandemic as well as the continuing labor shortage and ongoing supply chain disruptions.

Interest Income and Expense

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SCHEDULE OF AVERAGE BALANCES AND AVERAGE YIELDS AND RATES

For the Three Months Ended

March 31, 2022 For the Three Months Ended

March 31, 2021

For the Six Months Ended

Junes 30, 2022 For the Six Months Ended

June 30, 2021

(Dollars in thousands) Average

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Net interest income and net interest margin (4) $ 38,290 3.34 % $ 36,360 3.67 %

(1) Calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling $383 and $350 in 2022 and 2021, respectively.

(1) C alculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling $383 and $724 in 2022 and 2021, respectively.

(2) Loan interest income includes loan fees of $264 in 2022 and $3,890 in 2021.

2 unchanged sentences

The following table sets forth a summary of the changes in interest income and interest expense due to changes in average asset and liability balances (volume) and changes in average interest rates for the periods indicated.

Changes in Volume/Rate For the Three Months Ended March 31, 2022 and 2021

Changes in Volume/Rate For the Six Months Ended June 30, 2022 and 2021

(In thousands) Volume Rate Net

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(1) Computed on a tax equivalent basis for securities exempt from federal income taxes.

Interest and fee income from loans decreased $1,604,000 or 11.65% for the three months ended March 31, 2022 compared to the same period in 2021.

Net interest income during the first three months of 2022 was negatively impacted by a decrease in average total loans of $59,860,000 or (5.56)% to $1,017,280,000 compared to $1,077,140,000 for the same period in 2021.

The yield on average loans, excluding nonaccrual loans, was 4.85% for the three months ended March 31, 2022 compared to 5.18% for the same period in 2021.

Net interest income for the period ending March 31, 2022 was benefited by approximately $286,000 in nonrecurring income from prepayment penalties, compared to $430,000 recorded in the same period in 2021.

The impact to interest income from the accretion of the loan marks on acquired loans was $222,000 and $173,000 for the three months ended March 31, 2022 and 2021, respectively.

The remaining balance of accretable loan marks on acquired loans as of March 31, 2022 was $1,572,000.

Interest income from total investments on a non tax-equivalent basis (total investments include investment securities, Federal funds sold, interest bearing deposits in other banks, and other securities) increased $1,939,000 in the first three months of 2022 to $6,021,000 compared to $4,082,000 for the same period in 2021.

The yield on average total investments (total securities and interest-earning deposits) decreased 5 basis points to 2.02% for the three month period ended March 31, 2022 compared to 2.07% for the same period in 2021.

Average total securities and interest-earning deposits for the first three months of 2022 increased $411,248,000 or 48.01% to $1,267,880,000 compared to $856,632,000 for the same period in 2021.

Income from investments represents 34.22% of net interest income for the first three months of 2022 compared to 23.25% for the same period in 2021.

Interest and fee income from loans decreased $2,277,000 or 8.33% for the six months ended June 30, 2022 compared to the same period in 2021.

Net interest income during the first six months of 2022 was negatively impacted by a decrease in average total loans of $25,683,000 or (2.38)% to $1,051,772,000 compared to $1,077,455,000 for the same period in 2021.

The yield on average loans, excluding nonaccrual loans, was 4.80% for the six months ended June 30, 2022 compared to 5.11% for the same period in 2021.

Net interest income for the period ending June 30, 2022 was benefited by approximately $440,000 in nonrecurring income from prepayment penalties, compared to $434,000 recorded in the same period in 2021.

The impact to interest income from the accretion of the loan marks on acquired loans was $324,000 and $349,000 for the six months ended June 30, 2022 and 2021, respectively.

The remaining balance of accretable loan marks on acquired loans as of June 30, 2022 was $1,470,000.

Interest income from total investments on a non tax-equivalent basis (total investments include investment securities, Federal funds sold, interest bearing deposits in other banks, and other securities) increased $4,722,000 in the first six months of 2022 to $13,603,000 compared to $8,881,000 for the same period in 2021.

The yield on average total investments (total securities and interest-earning deposits) increased 21 basis points to 2.30% for the six month period ended June 30, 2022 compared to 2.09% for the same period in 2021.

Average total securities and interest-earning deposits for the first six months of 2022 increased $341,321,000 or 37.15% to $1,260,144,000 compared to $918,823,000 for the same period in 2021.

Income from investments represents 36.36% of net interest income for the first six months of 2022 compared to 24.92% for the same period in 2021.

In an effort to increase yields, without accepting unreasonable risk, a significant portion of the investment portfolio is in mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs).

At March 31, 2022, we held $697,117,000 or 60.01% of the total fair value of the investment portfolio in CMOs with an average yield of 1.82% as compared to $527,659,000 and $322,306,000 with average yields of 2.08% and 1.52% at December 31, 2021 and March 31, 2021, respectively.

At June 30, 2022, we held $507,788,000 or 49.96% of the total fair value of the investment portfolio in CMOs with an average yield of 1.92% as compared to $527,659,000 and $322,306,000 with average yields of 2.08% and 1.52% at December 31, 2021 and June 30, 2021, respectively.

We invest in CMOs and MBS as part of our overall strategy to increase our net interest margin.

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discount accretion represents management’s reasonable estimate of principal pay downs inherent in the total investment portfolio.

The net-of-tax unrealized loss on the investment portfolio was $49,287,000 at March 31, 2022 and is reflected in the Company’s equity.

At March 31, 2022, the average life of the investment portfolio was 4.93 years and the fair value of the portfolio reflected a net pre-tax unrealized loss of $69,974,000.

The net-of-tax unrealized loss on the investment portfolio was $73,919,000 at June 30, 2022 and is reflected in the Company’s equity.

At June 30, 2022, the average life of the investment portfolio was 5.92 years and the fair value of the portfolio reflected a net pre-tax unrealized loss of $80,011,000.

Management reviews fair value declines on individual investment securities to determine whether they represent an other-than-temporary impairment (OTTI).

Refer to Note 3 of the Notes to Consolidated Financial Statements (unaudited) for more detail.

For the three months ended March 31, 2022 and 2021, no OTTI was recorded.

For the six months ended June 30, 2022 and 2021, no OTTI was recorded.

Additional deterioration in the market values of our investment securities, if any, may require the Company to recognize OTTI losses in future periods.

A component of the Company’s strategic plan has been to use its investment portfolio to offset, in part, its interest rate risk relating to variable rate loans.

At March 31, 2022, we estimate an immediate rate increase of 200 basis points would result in an estimated decrease in the market value of the investment portfolio by approximately $119,000 or 9.77%.

Conversely, with an immediate rate decrease of 200 basis points, the estimated increase in the market value of the investment portfolio would be $(123,000) or (10.10)%.

At June 30, 2022, we estimate an immediate rate increase of 200 basis points would result in an estimated decrease in the market value of the investment portfolio by approximately $110,000 or 11.06%.

Conversely, with an immediate rate decrease of 200 basis points, the estimated decrease in the market value of the investment portfolio would be $114,000 or 11.46%.

Our modeling environment assumes management would take no action during an immediate shock of 200 basis points.

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The policy addresses issues of average life, duration, concentration guidelines, prohibited investments, impairment, and prohibited practices.

Total interest income on a non-tax equivalent basis for the three months ended March 31, 2022 increased $335,000 or 1.88% to $18,182,000 compared to $17,847,000 for the three months ended March 31, 2021.

The yield on interest earning assets decreased 53 basis points to 3.29% on a fully tax equivalent basis for the three months ended March 31, 2022 from 3.82% for the period ended March 31, 2021.

Total interest income on a non-tax equivalent basis for the six months ended June 30, 2022 increased $2,445,000 or 6.75% to $38,647,000 compared to $36,202,000 for the six months ended June 30, 2021.

The yield on interest earning assets decreased 28 basis points to 3.45% on a fully tax equivalent basis for the six months ended June 30, 2022 from 3.73% for the period ended June 30, 2021.

The decrease was the result of yield changes, decrease in interest rates, and asset mix changes.

Average interest earning assets increased to $2,285,160,000 for the three months ended March 31, 2022 compared to $1,933,772,000 for the three months ended March 31, 2021.

Average interest earning assets increased to $2,311,916,000 for the six months ended June 30, 2022 compared to $1,996,278,000 for the six months ended June 30, 2021.

The $315,638,000 increase in average earning assets was attributed to the $341,321,000 increase in average investments, offset by a $25,683,000 or (2.38)% decrease in average loans.

Interest expense on deposits for the three months ended March 31, 2022 and 2021 was $252,000 and $268,000, respectively.

The average interest rate on interest bearing deposits decreased to 0.08% for the three months ended March 31, 2022 compared to 0.11% for the same period ended March 31, 2021.

Average interest-bearing deposits increased 23.76% or $232,076,000 to $1,208,838,000 for the three months ended March 31, 2022 compared to $976,762,000 for the same period ended March 31, 2021.

Average other borrowed funds were $39,474,000 with an effective rate of 3.37% for the three months ended March 31, 2022 compared to $5,155,000 with an effective rate of 1.86% for the three months ended March 31, 2021.

Total interest expense on other borrowed funds was $333,000 for the three months ended March 31, 2022 and $24,000 for the three months ended March 31, 2021.

Interest expense on deposits for the six months ended June 30, 2022 and 2021 was $483,000 and $520,000, respectively.

The average interest rate on interest bearing deposits decreased to 0.08% for the six months ended June 30, 2022 compared to 0.10% for the same period ended June 30, 2021.

Average interest-bearing deposits increased 19.05% or $193,551,000 to $1,209,430,000 for the six months ended June 30, 2022 compared to $1,015,879,000 for the same period ended June 30, 2021.

Average other borrowed funds were $59,062,000 with an effective rate of 2.56% for the six months ended June 30, 2022 compared to $5,155,000 with an effective rate of 1.78% for the six months ended June 30, 2021.

Total interest expense on other borrowed funds was $757,000 for the six months ended June 30, 2022 and $46,000 for the six months ended June 30, 2021.

Included in other borrowings are the junior subordinated deferrable interest debentures acquired from Service 1 st , subordinated debt, advances on lines of credit, advances from the Federal Home Loan Bank (“FHLB”) , and overnight borrowings.

The junior subordinated debentures carry a floating rate based on the three month LIBOR plus a margin of 1.60%.

The rates were 1.84% and 1.73% at March 31, 2022 and 2021, respectively .

The rates were 2.64% and 1.73% at June 30, 2022 and 2021, respectively .

The subordinated debt, issued in 2021, initially bears a fixed interest rate of 3.125% per year until December 1, 2026 when the interest rate will reset to a floating rate.

See the section on “Financial Condition” for more detail.

The cost of interest-bearing liabilities increased 7 basis points to 0.19% for the three-month period ended March 31, 2022 compared to 0.12% for the same period in 2021.

The cost of total deposits decreased to 0.05% compared to 0.06% for the three-month periods ended March 31, 2022 and 2021, respectively.

The cost of interest-bearing liabilities increased 9 basis points to 0.20% for the six-month period ended June 30, 2022 compared to 0.11% for the same period in 2021.

The cost of total deposits decreased to 0.05% compared to 0.06% for the six-month periods ended June 30, 2022 and 2021, respectively.

Average non-interest bearing demand deposits increased 8.62% to $944,362,000 in 2022 compared to $869,386,000 for 2021.

The ratio of average non-interest bearing demand deposits to average total deposits decreased to 43.77% in the three-month period ended March 31, 2022 compared to 46.39% for the same period in 2021.

The ratio of average non-interest bearing demand deposits to average total deposits decreased to 43.85% in the six-month period ended June 30, 2022 compared to 46.11% for the same period in 2021.

Net Interest Income before Provision for Credit Losses

Net interest income before the reversal of provision for credit losses for the three months ended March 31, 2022 increased by $42,000 or 0.24% to $17,597,000 compared to $17,555,000 for the same period in 2021.

Net interest income before the reversal of provision for credit losses for the six months ended June 30, 2022 increased by $1,771,000 or 4.97% to $37,407,000 compared to $35,636,000 for the same period in 2021.

The increase was a result of yield changes, asset mix changes, and an increase in average earning assets, partially offset by an increase in average interest bearing liabilities.

The impact to interest income from the accretion of the loan marks on acquired loans was $222,000 and $173,000 for the three months ended March 31, 2022 and 2021, respectively.

In addition, net interest income before the provision for credit losses for the three months ended March 31, 2022 was benefited by approximately $286,000 in nonrecurring income from prepayment penalties, as compared to $430,000 in nonrecurring income for the three months ended March 31, 2021.

Excluding these reversals and benefits, net interest income for the three months ended March 31, 2022 increased by $137,000

compared to the three months ended March 31, 2021.

Average interest earning assets were $2,285,160,000 for the three months ended March 31, 2022 with a net interest margin (fully tax equivalent basis) of 3.19% compared to $1,933,772,000 with a net interest margin (fully tax equivalent basis) of 3.76% for the three months ended March 31, 2021.

The impact to interest income from the accretion of the loan marks on acquired loans was $324,000 and $349,000 for the six months ended June 30, 2022 and 2021, respectively.

In addition, net interest income before the provision for credit losses for the six months ended June 30, 2022 was benefited by approximately $440,000 in nonrecurring income from prepayment penalties, as compared to $434,000 in nonrecurring income for the six months ended June 30, 2021.

Excluding these reversals and benefits, net interest income for the six months ended June 30, 2022 increased by $1,790,000 compared to the six months ended June 30, 2021.

Average interest earning assets were $2,311,916,000 for the six months ended June 30,

2022 with a net interest margin (fully tax equivalent basis) of 3.34% compared to $1,996,278,000 with a net interest margin (fully tax equivalent basis) of 3.67% for the six months ended June 30, 2021.

The $315,638,000 increase in average earning assets was attributed to the $341,321,000 increase in average total investments, offset by the $25,683,000 or (2.38)% decrease in average loans.

For the three months ended March 31, 2022, the effective yield on investment securities including Federal funds sold and interest-earning deposits in other banks decreased 5 basis points.

For the six months ended June 30, 2022, the effective yield on investment securities including Federal funds sold and interest-earning deposits in other banks increased 21 basis points.

The effective yield on loans decreased 31 basis points.

Average interest bearing liabilities increased 27.13% to $1,248,312,000 for the three months ended March 31, 2022, compared to $981,917,000 for the same period in 2021.

Average interest bearing liabilities increased 24.24% to $1,268,492,000 for the six months ended June 30, 2022, compared to $1,021,034,000 for the same period in 2021.

Provision for Credit Losses

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The allocation of the allowance for credit losses is set forth below (in thousands):

Loan Type March 31, 2022 December 31, 2021

Loan Type June 30, 2022 December 31, 2021

Commercial and industrial $ 1,754 $ 1,691

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Management believes that the level of allowance for loan losses allocated to commercial and real estate loans has been adjusted accordingly.

During the three months ended March 31, 2022, the Company adjusted the economic risk and interest rate factors to incorporate the potential and realized implications from rising interest rates, input price increases and supply chain backlogs.

The Company had net recoveries totaling $264,000 for the three months ended March 31, 2022, and $941,000 for the same period in 2021.

Nonperforming loans, consisting entirely of nonaccrual loans, were $292,000 and $946,000 at March 31, 2022 and December 31, 2021, respectively, and $3,783,000 at March 31, 2021.

Nonperforming loans as a percentage of total loans were 0.03% at March 31, 2022 compared to 0.09% at December 31, 2021 and 0.35% at March 31, 2021.

The Company had no other real estate owned (OREO) at March 31, 2022 or December 31, 2021.

The Company held no repossessed assets at March 31, 2022 or December 31, 2021.

The annualized net charge-off (recovery) ratio, which reflects net charge-offs (recoveries) to average loans was (0.10)% for the three months ended March 31, 2022, and (0.35)% for the same period in 2021.

During the six months ended June 30, 2022, the Company recorded no provision for credit losses, compared to a $3,300,000 reversal of provisi on durin g the six months ended June 30, 2021.

During the six months ended June 30, 2022, the Company adjusted the economic risk and interest rate factors to incorporate the potential and realized implications from rising interest rates, input price increases and supply chain backlogs.

The Company had net recoveries totaling $273,000 for the six months ended June 30, 2022, and $824,000 for the same period in 2021.

Nonperforming loans, consisting entirely of nonaccrual loans, were $271,000 and $946,000 at June 30, 2022 and December 31, 2021, respectively, and $2,035,000 at June 30, 2021.

Nonperforming loans as a percentage of total loans were 0.02% at June 30, 2022 compared to 0.09% at December 31, 2021 and 0.19% at June 30, 2021.

The Company had no other real estate owned (OREO) at June 30, 2022 or December 31, 2021.

The Company held no repossessed assets at June 30, 2022 or December 31, 2021.

The annualized net charge-off (recovery) ratio, which reflects net charge-offs (recoveries) to average loans was (0.05)% for the six months ended June 30, 2022, and (0.15)% for the same period in 2021.

Economic pressures may negatively impact the financial condition of borrowers to whom the Company has extended credit and as a result, when negative economic conditions are anticipated, we may be required to make significant provisions to the allowance for credit losses.

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We have been and will continue to be proactive in looking for signs of deterioration within the loan portfolio in an effort to manage credit quality and work with borrowers where possible to mitigate losses.

As of March 31, 2022, there were $10.7 million in classified loans of which $2.5 million related to commercial and industrial loans, $2.1 million to agricultural production, $3.6 million to owner occupied real estate, and $2.5 million in commercial real estate.

As of June 30, 2022, there were $10.8 million in classified loans of which $2.5 million related to commercial and industrial loans, $2.2 million to agricultural production, $3.5 million to owner occupied real estate, and $2.5 million in commercial real estate.

This compares to $8.5 in classified loans of which $2.6 million related to commercial and industrial loans, $2.4 million to agricultural production, $3.6 million to owner occupied real estate as of December 31, 2021.

As of March 31, 2022, we believe, based on all current and available information, the allowance for credit losses is adequate to absorb probable incurred losses within the loan portfolio.

As of June 30, 2022, we believe, based on all current and available information, the allowance for credit losses is adequate to absorb probable incurred losses within the loan portfolio.

However, no assurance can be given that we may not sustain charge-offs which are in excess of the allowance in any given period.

1 unchanged sentence

Net Interest Income after Provision for Credit Losses

Net interest income, after the provision for credit losses, was $17,597,000 for the three months period ended March 31, 2022 and $19,355,000 for the same period in 2021.

Net interest income, after the provision for credit losses, was $37,407,000 for the six months period ended June 30, 2022 and $38,936,000 for the same period in 2021.

Non-Interest Income

Non-interest income is comprised of customer service charges, loan placement fees, net gains on sales and calls of investment securities, appreciation in cash surrender value of bank-owned life insurance, FHLB dividends, and other income.

Non-interest income was $1,834,000 for the three months ended March 31, 2022 compared to $1,999,000 for the same period in 2021.

The $165,000 or 8.25% decrease in non-interest income during the three months ended March 31, 2022 was primarily driven by a a decrease in loan placement fees of $358,000 and a decrease of $276,000 in other income, offset by an increase of $206,000 in net realized gains on sales and calls of investment securities, an increase in service charge income of $107,000, an increase of $72,000 in interchange fees, an increase of $69,000 in appreciation in cash surrender value of bank-owned life insurance, and an increase in FHLB dividends of $15,000.

During the three months ended March 31, 2022, we realized a net gain on sales and calls of investment securities of $206,000 compared to a no net gains for the same period in 2021.

The net gains realized on sales and calls of investment securities in 2022 were the result of a partial restructuring of the investment portfolio designed to improve the future performance of the portfolio.

Customer service charges increased $107,000 or 24.77% to $539,000 for the first three months of 2022 compared to $432,000 for the same period in 2021.

Interchange fees increased $72,000 to $442,000 the first three months of 2022 compared to $370,000 for the same period in 2021.

Loan placement fees decreased $358,000 or 54.49% to $299,000 for the first three months of 2022 compared to $657,000 for the same period in 2021.

Other income decreased $276,000 the first three months of 2022 compared to the same period in 2021.

Non-interest income was $2,604,000 for the six months ended June 30, 2022 compared to $4,076,000 for the same period in 2021.

During the six months ended June 30, 2022, we realized a net loss on sales and calls of investment securities of $763,000 compared to a $79,000 net gain for the same period in 2021.

The net losses realized on sales and calls of investment securities in 2022 were the result of a partial restructuring of the investment portfolio designed to improve the future performance of the portfolio and provide needed liquidity for loan growth.

Customer service charges increased $184,000 or 20.47% to $1,083,000 for the first six months of 2022 compared to $899,000 for the same period in 2021.

Interchange fees increased $79,000 to $920,000 the first six months of 2022 compared to $841,000 for the same period in 2021.

Loan placement fees decreased $600,000 or 51.41% to $567,000 for the first six months of 2022 compared to $1,167,000 for the same period in 2021.

Other income decreased $603,000 the first six months of 2022 compared to the same period in 2021.

The Bank holds stock from the Federal Home Loan Bank (“FHLB”) of San Francisco in conjunction with our borrowing capacity and generally earns quarterly dividends.

We currently hold $6,169,000 in FHLB stock.

We received dividends totaling $85,000 in the three months ended March 31, 2022, compared to $70,000 for the same period in 2021.

We received dividends totaling $167,000 in the six months ended June 30, 2022, compared to $153,000 for the same period in 2021.

Non-Interest Expenses

Salaries and employee benefits, occupancy and equipment, information technology, regulatory assessments, professional services, Internet banking, and data processing are the major categories of non-interest expenses.

Non-interest expenses increased $57,000 or 0.50% to $11,445,000 for the three months ended March 31, 2022, compared to $11,388,000 for the three months ended March 31, 2021.

The net increase for the first three months of 2022 was primarily the result of increases in information technology of $199,000, regulatory assessments of $61,000, occupancy and equipment expenses of $49,000, professional services of $18,000, advertising of $11,000, donations of $6,000, general insurance of $3,000, salaries and employee benefits of $6,000, directors’ expenses of $4,000, amortization of software of $3,000, partially offset by decreases in internet banking of $103,000, data processing expenses of $76,000, personnel of $70,000, ATM/Debit card expenses of $30,000, operating losses of $17,000, stationary and supplies of $16,000, armored courier of $13,000, and postage of $5,000.

The Company’s efficiency ratio, measured as the percentage of non-interest expenses (exclusive of amortization of core deposit intangible assets and foreclosure expenses) to net interest income before provision for credit losses (calculated on a fully tax equivalent basis) plus non-interest income (exclusive of net realized gains on sales and calls of investments, OREO related gains and losses, and gains related to the collection of life insurance proceeds) was 57.66% for the three months ended

March 31, 2022 compared to 56.34% for the three months ended March 31, 2021.

The modest deterioration in the efficiency ratio was due to the decrease in non-interest income outpacing the increase in non-interest expense.

Salaries and employee benefits increased $6,000 or 0.09% to $6,944,000 for the first three months of 2022 compared to $6,938,000 for the three months ended March 31, 2021.

Full time equivalent employees were 244 for the three months ended March 31, 2022, compared to 269 for the three months ended March 31, 2021.

Occupancy and equipment expense increased $49,000 or 4.40% to $1,162,000 for the three months ended March 31, 2022 compared to $1,113,000 for the three months ended March 31, 2021.

Non-interest expenses increased $510,000 or 2.22% to $23,528,000 for the six months ended June 30, 2022, compared to $23,018,000 for the six months ended June 30, 2021.

The net increase for the first six months of 2022 was primarily the result of increases in information technology of $416,000, regulatory assessments of $83,000, occupancy and equipment expenses of $192,000, professional services of $7,000, advertising of $21,000, general insurance of $15,000, salaries and employee benefits of $84,000, partially offset by decreases in internet banking of $139,000, data processing expenses of $153,000, personnel expenses of $45,000, donations of $9,000, ATM/Debit card expenses of $4,000, operating losses of $29,000, stationary and supplies expenses of $7,000, armored courier expenses of $20,000, directors’ expenses of $61,000, and amortization of software of $4,000.

June 30, 2022 compared to 55.96% for the six months ended June 30, 2021.

The modest improvement in the efficiency ratio was due to the increase in non-interest income outpacing the increase in non-interest expense.

Salaries and employee benefits increased $84,000 or 0.60% to $14,001,000 for the first six months of 2022 compared to $13,917,000 for the six months ended June 30, 2021.

Full time equivalent employees were 244 for the six months ended June 30, 2022, compared to 261 for the six months ended June 30, 2021.

Occupancy and equipment expense increased $192,000 or 8.30% to $2,506,000 for the six months ended June 30, 2022 compared to $2,314,000 for the six months ended June 30, 2021.

The Company made no changes in its depreciation expense methodology.

The Company operated 20 full-service offices at March 31, 2022 and at March 31, 2021.

Data processing expense decreased to $541,000 for the three months ended March 31, 2022 compared to $617,000 for the same period in 2021.

Regulatory assessments increased to $222,000 for the three months ended March 31, 2022 compared to $161,000 for the same period in 2021.

The Company operated 20 full-service offices at June 30, 2022 and at June 30, 2021.

Data processing expense decreased to $1,089,000 for the six months ended June 30, 2022 compared to $1,242,000 for the same period in 2021.

Regulatory assessments increased to $416,000 for the six months ended June 30, 2022 compared to $333,000 for the same period in 2021.

The assessment base for calculating regulatory assessments is average assets less average tangible equity.

Professional services increased by $18,000 in the first three months of 2022 compared to the same period in 2021.

Professional services increased by $7,000 in the first six months of 2022 compared to the same period in 2021.

The following table shows significant components of other non-interest expense as a percentage of average assets.

For the Three Months

Ended March 31,

For the Six Months

Ended June 30,

(Dollars in thousands) Other Expense % Average

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Operating losses 76 0.01 % 47 — %

Appraisal Fees 28 — % 47 — %

Other 481 0.04 % 455 0.04 %

1 unchanged sentence

Provision for Income Taxes

Our effective income tax rate was 23.79% for the three months ended March 31, 2022 compared to 24.95% for the three months ended March 31, 2021.

The Company reported an income tax provision of $1,900,000 for the three months ended March 31, 2022, compared to $2,487,000 for the three months ended March 31, 2021.

Our effective income tax rate was 23.39% for the six months ended June 30, 2022 compared to 24.77% for the six months ended June 30, 2021.

The Company reported an income tax provision of $3,855,000 for the six months ended June 30, 2022, compared to $4,952,000 for the six months ended June 30, 2021.

The effective tax rate was affected by the increase in tax-exempt interest.

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If deemed necessary, the Company maintains a reserve for uncertain income taxes where the merits of the position taken or the amount of the position that would be ultimately sustained upon examination do not meet a more-likely-than-not criteria.

As of March 31, 2022 and December 31, 2021, there was no reserve for uncertain tax positions.

As of June 30, 2022 and December 31, 2021, there was no reserve for uncertain tax positions.

Net Income for the Second Quarter of 2022 Compared to the Second Quarter of 2021

Net income decreased to $6,542,000 for the quarter ended June 30, 2022 compared to $7,563,000 for the quarter ended June 30, 2021.

Basic earnings per share was $0.56 for the quarter ended June 30, 2022 compared to $0.61 for the same period in 2021.

Diluted earnings per share was $0.56 for the quarter ended June 30, 2022 compared to $0.60 for the same period in 2021.

Annualized ROE was 14.73% for the quarter ended June 30, 2022 compared to 12.25% for the quarter ended June 30, 2021.

Annualized ROA for the three months ended June 30, 2022 was 1.07% compared to 1.36% for the quarter ended June 30, 2021.

The decrease in net income during the second quarter of 2022 compared to the same period in 2021 is primarily due to a decrease in total non-interest income of $1,307,000, a lack of a reversal of provision for credit losses of $1,500,000, and an increase in non-interest expenses of $453,000, partially offset by an increase in net interest income before the provision for credit losses of $1,729,000, and a decrease in the provision for income taxes of $510,000.

During the quarter ended June 30, 2022, the Company recorded no provision for credit losses, compared to a $1,500,000 reversal of provision during the quarter ended June 30, 2021.

Non-interest income decreased $1,307,000 or 62.93% to $770,000 for the quarter ended June 30, 2022 compared to $2,077,000 in the same period in 2021, primarily due to an increase in net realized losses on sales and calls of investment securities of $890,000.

In addition, during the second quarter 2022 there was an increase of $77,000 in service charge income , a decrease in other income of $327,000, and an increase of $7,000 in interchange fees, offset by a decrease in loan placement fees of $242,000, compared to the same period in 2021.

Interest Income and Expense

The following table sets forth a summary of average balances with corresponding interest income and interest expense as well as average yield and cost information for the periods presented.

Average balances are derived from daily balances, and non-accrual loans are not included as interest earning assets for purposes of this table.

CENTRAL VALLEY COMMUNITY BANCORP

SCHEDULE OF AVERAGE BALANCES AND AVERAGE YIELDS AND RATES

For the Three Months Ended

June 30, 2022 For the Three Months Ended

June 30, 2021

(Dollars in thousands) Average

Balance Interest

Expense Average

Balance Interest

Expense Average

Interest-earning deposits in other banks $ 33,067 $ 53 0.64 % $ 114,590 $ 29 0.10 %

Taxable securities 945,210 5,651 2.39 % 629,284 3,361 2.14 %

Non-taxable securities (1) 274,217 2,378 3.47 % 236,455 1,784 3.02 %

Total investment securities 1,219,427 8,029 2.63 % 865,739 5,145 2.38 %

Total securities and interest-earning deposits

1,252,494 8,082 2.58 % 980,329 5,174 2.11 %

Loans (2) (3) 1,085,887 12,883 4.76 % 1,077,774 13,556 5.04 %

Total interest-earning assets 2,338,381 $ 20,965 3.60 % 2,058,103 $ 18,730 3.65 %

Allowance for credit losses (9,870) (11,928)

Non-accrual loans 280 2,651

Cash and due from banks 33,050 35,997

Bank premises and equipment 8,132 8,416

Other assets 71,908 134,393

Total average assets $ 2,441,881 $ 2,227,632

LIABILITIES AND SHAREHOLDERS’ EQUITY

Interest-bearing liabilities:

Savings and NOW accounts $ 600,685 $ 34 0.02 % $ 522,209 $ 45 0.03 %

Money market accounts 520,224 164 0.13 % 441,623 160 0.15 %

Time certificates of deposit 89,107 32 0.14 % 90,735 47 0.21 %

Total interest-bearing deposits 1,210,016 230 0.08 % 1,054,567 252 0.10 %

Other borrowed funds 78,435 424 2.16 % 5,155 22 1.71 %

Total interest-bearing liabilities 1,288,451 $ 654 0.20 % 1,059,722 $ 274 0.10 %

Non-interest bearing demand deposits 947,724 893,441

Other liabilities 28,091 27,510

Shareholders’ equity 177,615 246,959

Total average liabilities and shareholders’ equity $ 2,441,881 $ 2,227,632

Interest income and rate earned on average earning assets

$ 20,965 3.60 % $ 18,730 3.65 %

Interest expense and interest cost related to average interest-bearing liabilities

654 0.20 % 274 0.10 %

Net interest income and net interest margin (4) $ 20,311 3.48 % $ 18,456 3.60 %

(1) Calculated on a fully tax equivalent basis, which includes Federal tax benefits relating to income earned on municipal bonds totaling $499 and $375 in 2022 and 2021, respectively.

(2) Loan interest income includes loan fees of $490 in 2022 and $1,821 in 2021.

(3) Average loans do not include non-accrual loans but do include interest income recovered from previously charged off loans.

(4) Net interest margin is computed by dividing net interest income by total average interest-earning assets .

The change in interest due to both rate and volume has been allocated to the change in rate.

Changes in Volume/Rate For the Three Months Ended June 30, 2022 and 2021

(In thousands) Volume Rate Net

Increase (decrease) due to changes in:

Interest income:

Interest-earning deposits in other banks $ (20) $ 44 $ 24

Investment securities:

Taxable 1,687 603 2,290

Non-taxable (1) 284 310 594

Total investment securities 1,971 913 2,884

Federal funds sold — — —

Loans 101 (775) (674)

Total earning assets (1) 2,052 182 2,234

Interest expense:

Savings, NOW and MMA 34 (42) (8)

Time certificate of deposits — (15) (15)

Total interest-bearing deposits 34 (57) (23)

Other borrowed funds 326 75 401

Total interest-bearing liabilities 360 18 378

Net interest income (1) $ 1,692 $ 164 $ 1,856

(1) Computed on a tax equivalent basis for securities exempt from federal income taxes.

Interest and fee income from loans decreased $673,000 or 4.96% to $12,883,000 for the second quarter of 2022 compared to $13,556,000 for the same period in 2021.

Total average loans, including nonaccrual loans, for the second quarter of 2022 increased $5,742,000 or 0.53% to $1,086,167,000 compared to $1,080,425,000 for the same period in 2021.

Yield on the loan portfolio, excluding nonaccrual loans, was 4.76% and 5.04% for the second quarters ending June 30, 2022 and 2021, respectively.

Net interest income during the second quarters of 2022 and 2021 benefited by approximately $154,000 and $4,000, respectively, in nonrecurring income from prepayment penalties and payoff of loans previously on nonaccrual status.

The accretion of the loan marks on acquired loans increased interest income by $102,000 and $176,000 during the quarters ended June 30, 2022 and 2021, respectively.

Income from investments represents 38.27% of net interest income for the second quarter of 2022 compared to 26.54% for the same quarter in 2021.

Interest income from total investments on a non tax equivalent basis (total investments include investment securities, Federal funds sold, interest bearing deposits with other banks, and other securities) increased $2,783,000 in the second quarter of 2022 to $7,582,000 compared to $4,799,000, for the same period in 2021.

The yield on average total investments increased 47 basis points to 2.58% on a fully tax equivalent basis for the second quarter of 2022 compared to 2.11% on a fully tax equivalent basis for the second quarter of 2021.

Average total investments and interest bearing deposits in other banks for the second quarter of 2022 increased $272,165,000 or 27.76% to $1,252,494,000 compared to $980,329,000 for the second quarter of 2021.

Total interest income for the second quarter of 2022 increased $2,110,000 or 11.50% to $20,465,000 compared to $18,355,000 for the second quarter ended June 30, 2021.

The yield on interest earning assets decreased to 3.60% on a fully tax equivalent basis for the second quarter ended June 30, 2022 from 3.65% on a fully tax equivalent basis for the second quarter ended June 30, 2021.

Average interest earning assets increased to $2,338,381,000 for the second quarter ended June 30, 2022 compared to $2,058,103,000 for the second quarter ended June 30, 2021.

The $280,278,000 increase in average earning assets was attributed to the $8,113,000 increase in average loans, offset by the $272,165,000 increase in total investments.

Interest expense on deposits for the quarter ended June 30, 2022 decreased $21,000 or 8.33% to $231,000 compared to $252,000 for the quarter ended June 30, 2021.

The cost of deposits, calculated by dividing annualized interest expense on interest bearing deposits by total deposits, was 0.04% and 0.05% for the quarters ended June 30, 2022 and 2021, respectively.

Average interest bearing deposits increased 14.74% or $155,449,000 in the second quarter of 2022 compared to the same period in 2021.

Average interest-bearing deposits were $1,210,016,000 for the quarter ended June 30, 2022, with an effective rate paid of 0.08%, compared to $1,054,567,000 for the same period in 2021, with an effective rate paid of 0.10%.

Average other borrowed funds totaled $78,435,000 for the quarter ended June 30, 2022, with an effective rate of 2.16% for the quarter ended June 30, 2022 compared to $5,155,000 and 1.71% for the quarter ended June 30, 2021.

As a result, interest expense on borrowed funds increased $402,000 to $424,000 for the quarter ended June 30, 2022, from $22,000 for the

quarter ended June 30, 2021.

Other borrowings are comprised of advances from the Federal Home Loan Bank, junior subordinated deferrable interest debentures and advances on available unsecured lines of credit with correspondent banks.

The cost of our interest bearing liabilities was 0.20% and 0.10% for the quarters ended June 30, 2022 and 2021.

The cost of total deposits was 0.04% and 0.05% for the quarters ended June 30, 2022 and 2021.

Average non-interest bearing demand deposits increased 6.08% to $947,724,000 for the quarter ended June 30, 2022 compared to $893,441,000 for the quarter ended June 30, 2021.

The ratio of average non-interest bearing demand deposits to average total deposits was 43.92% in the second quarter of 2022 compared to 45.86% for the same period in 2021.

Net Interest Income before Provision for Credit Losses

Net interest income before provision for credit losses for the quarter ended June 30, 2022, increased $1,729,000 or 9.56% to $19,810,000 compared to $18,081,000 for the quarter ended June 30, 2021.

The increase was due to asset mix changes, and an increase in average interest-bearing liabilities, partially offset by the increase in average interest earning assets.

Average interest earning assets were $2,338,381,000 for the quarter ended June 30, 2022, with a net interest margin (fully tax equivalent basis) of 3.48% compared to $2,058,103,000 with a net interest margin (fully tax equivalent basis) of 3.60% for the quarter ended June 30, 2021.

The $280,278,000 increase in average earning assets can be attributed to the $5,742,000 increase in loans, and the $272,165,000 increase in total investments.

Average interest bearing liabilities increased 21.58% to $1,288,451,000 for the quarter ended June 30, 2022 compared to $1,059,722,000 for the same period in 2021.

Provision for Credit Losses

During the quarter ended June 30, 2022, the Company recorded no provision for credit losses, compared to $1,500,000 reversal of provision during the quarter ended June 30, 2021.

The annualized net charge-off (recovery) ratio, which reflects net charge-offs (recoveries) to average loans, was 0.00% for the quarter ended June 30, 2022 compared to 0.04% for the quarter ended June 30, 2021.

During the quarter ended June 30, 2022, the Company had net recoveries totaling $9,000 compared to net charge-offs of $117,000 for the same period in 2021.

Gross recoveries of previously charged off loan balances during the quarters ended June 30, 2022 and 2021 were $25,000 and $54,000, respectively.

Gross charge-offs during the quarters ended June 30, 2022 and 2021 were $16,000 and $171,000, respectively.

The majority of the loans charged off were previously classified and sufficient specific reserves related to these impaired credits were held in the allowance for credit losses in reporting periods prior to the date of charge-off.

Non-Interest Income

Non-interest income was $770,000 for the quarter ended June 30, 2022 compared to $2,077,000 for the same period ended June 30, 2021.

The $1,307,000 or 62.93% decrease in non-interest income for the quarter ended June 30, 2022 was primarily due to recording a $890,000 increase in net realized losses on sales and calls of investment securities, a $327,000 decrease in other income, and a $242,000 decrease in loan placement fees, partially offset by a $77,000 increase in service charge income, a $69,000 increase in appreciation in cash surrender value of bank-owned life insurance, and a $7,000 increase in interchange fees.

Customer service charges increased $77,000 or 16.49% to $544,000 for the second quarter of 2022 compared to $467,000 for the same period in 2021, due primarily to an increase in overdraft and analysis fee income.

Other income decreased $327,000 or 72.83% to $122,000 for the second quarter of 2022 compared to $449,000 for the same period in 2021.

Non-Interest Expenses

Salaries and employee benefits, occupancy and equipment, regulatory assessments, data processing, acquisition and integration expenses, Internet banking, license and maintenance contracts, and professional services are the major categories of non-interest expenses.

Non-interest expenses increased $453,000 or 3.90% to $12,083,000 for the quarter ended June 30, 2022 compared to $11,630,000 for the same period in 2021.

The net increase quarter over quarter was a result of increases of $217,000 in information technology expenses, increases in occupancy and equipment of $143,000, increases in salaries and employee benefits of $78,000, increases in operating losses of $46,000, increases in regulatory assessments of $22,000, increases in mileage and travel of $51,000, increases in personnel expense of $25,000, increases in telephone expenses of $22,000, increases in education and training expenses of $21,000, and increases in advertising expenses of $10,000.

The increases were partially offset by the decreases in data processing expenses of $77,000, decreases in directors’ expenses of $65,000, decreases in Internet banking of $36,000, decreases in amortization of core deposit intangibles of $33,000, decreases in appraisal fees of $29,000, and decreases in professional fees of $11,000.

The Company’s efficiency ratio improved to 54.20% for the second quarter of 2022 compared to 55.58% for the second quarter of 2021.

The improvement in the efficiency ratio is due to the growth in operating revenue outpacing the growth in non-interest expense.

Salaries and employee benefits increased $78,000 or 1.12% to $7,057,000 for the second quarter of 2022 compared to $6,979,000 for the second quarter of 2021.

The number of full time equivalent (FTE) employees as of June 30, 2022, December 31, 2021 and June 30, 2021 was 248, 273, and 246, respectively.

Provision for Income Taxes

The effective income tax rate was 23.01% for the second quarter of 2022 compared to 24.58% for the same period in 2021.

Provision for income taxes totaled $1,955,000 and $2,465,000 for the quarters ended June 30, 2022 and 2021, respectively.

FINANCIAL CONDITION

Summary of Changes in Consolidated Balance Sheets

March 31, 2022 compared to December 31, 2021

Total assets were $2,423,030,000 as of March 31, 2022, compared to $2,450,139,000 at December 31, 2021, a decrease of 1.11% or $27,109,000.

Total gross loans were $1,012,042,000 at March 31, 2022, compared to $1,039,111,000 at December 31, 2021, a decrease of $27,069,000 or 2.61%.

The total investment portfolio (including Federal funds sold and interest-earning deposits in other banks) decreased 2.02% or $25,278,000 to $1,225,401,000 at March 31, 2022 compared to $1,250,679,000 at December 31, 2021.

Total deposits increased 1.86% or $39,563,000 to $2,162,360,000 at March 31, 2022, compared to $2,122,797,000 at December 31, 2021.

Shareholders’ equity decreased $56,185,000 or 22.67% to $191,660,000 at March 31, 2022, compared to $247,845,000 at December 31, 2021.

The decrease in shareholders’ equity was driven by the decrease in unrealized gains on available-for-sale (AFS) securities, and share repurchases, offset by the retention of e arnings, net of dividends paid .

Accrued interest payable and other liabilities was $29,520,000 at March 31, 2022, compared to $40,043,000 at December 31, 2021, a decrease of $10,523,000.

June 30, 2022 compared to December 31, 2021

Total assets were $2,353,592,000 as of June 30, 2022, compared to $2,450,139,000 at December 31, 2021, a decrease of 3.94% or $96,547,000.

Total gross loans were $1,135,964,000 at June 30, 2022, compared to $1,039,111,000 at December 31, 2021, an increase of $96,853,000 or 9.32%.

The total investment portfolio (including Federal funds sold and interest-earning deposits in other banks) decreased 18.13% or $226,810,000 to $1,023,869,000 at June 30, 2022 compared to $1,250,679,000 at December 31, 2021.

Total deposits decreased 0.79% or $16,800,000 to $2,105,997,000 at June 30, 2022, compared to $2,122,797,000 at December 31, 2021.

Shareholders’ equity decreased $77,592,000 or 31.31% to $170,253,000 at June 30, 2022, compared to $247,845,000 at December 31, 2021.

The decrease in shareholders’ equity was driven by the adverse change in the unrealized losses on available-for-sale (AFS) investment securities, dividends paid, and share repurchases, offset by the retention of e arnings.

Accrued interest payable and other liabilities was $28,492,000 at June 30, 2022, compared to $40,043,000 at December 31, 2021, a decrease of $11,551,000.

The Company measures the fair values of its financial instruments utilizing a hierarchical framework associated with the level of observable pricing scenarios utilized in measuring financial instruments at fair value.

6 unchanged sentences

Government sponsored entities and agencies collateralized by residential mortgage backed obligations, private label mortgage and asset backed securities (PLMABS), corporate debt securities, and obligations of states and political subdivision securities and are classified at the date of acquisition as available for sale or held to maturity.

As of March 31, 2022, investment securities with a fair value of $223,954,000, or 19.28% of our investment securities portfolio, were held as collateral for public funds, short and long-term borrowings, treasury, tax, and for other purposes.

As of June 30, 2022, investment securities with a fair value of $185,061,000, or 18.21% of our investment securities portfolio, were held as collateral for public funds, short and long-term borrowings, treasury, tax, and for other purposes.

Our investment policies are established by the Board of Directors and implemented by management.

1 unchanged sentence

The level of our investment portfolio as a percentage of our total earning assets is generally considered higher than our peers due primarily to a comparatively low loan-to-deposit ratio.

Our loan-to-deposit ratio at March 31, 2022 was 46.80% compared to 48.95% at December 31, 2021.

Our loan-to-deposit ratio at June 30, 2022 was 53.94% compared to 48.95% at December 31, 2021.

The loan-to-deposit ratio of our peers was 71.00% at December 31, 2021.

The total investment portfolio, including Federal funds sold and interest-earning deposits in other banks, decreased 2.02% or $25,278,000 to $1,225,401,000 at March 31, 2022, from $1,250,679,000 at December 31, 2021.

The fair value of the available-for-sale investment portfolio reflected a net unrealized loss of $69,974,000 at March 31, 2022, compared to a net unrealized gain of $10,835,000 at December 31, 2021.

The total investment portfolio, including Federal funds sold and interest-earning deposits in other banks, decreased 18.13% or $226,810,000 to $1,023,869,000 at June 30, 2022, from $1,250,679,000 at December 31, 2021.

The fair value of the available-for-sale investment portfolio reflected a net unrealized loss of $80,011,000 at June 30, 2022, compared to a net unrealized gain of $10,835,000 at December 31, 2021.

During the second quarter of 2022, the Company re-designated certain securities previously classified as available-for-sale to the held-to-maturity classification.

The securities re-designated consisted of obligations of states and political subdivision securities, U.S.

Government sponsored entity and agency securities collateralized by residential mortgage obligations, private label mortgage and asset backed securities, and corporate debt securities with a total carrying value of $306.7 million at April 1, 2022.

At the time of re-designation the securities included $25.3 million of pretax unrealized losses in other comprehensive income which is being amortized over the remaining life of the securities in a manner consistent with the amortization of a premium or discount.

The Board and management have had periodic discussions about our strategy for risk management in dealing with potential losses should interest rates begin to rise.

4 unchanged sentences

The discount rate in this analysis is the original yield expected at time of purchase.

Management evaluated all available-for-sale investment securities with an unrealized loss at March 31, 2022 and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at

March 31, 2022 greater than 10% of the recorded book value on that date, or which had an unrealized loss of more than $75,000.

Management evaluated all available-for-sale investment securities with an unrealized loss at June 30, 2022 and identified those that had an unrealized loss for at least a consecutive 12 month period, which had an unrealized loss at June 30, 2022 greater than 10% of the recorded book value on that date, or which had an unrealized loss of more than $75,000.

Management also analyzed any securities that may have been downgraded by credit rating agencies.

For those securities that met the evaluation criteria, management obtained and reviewed the most recently published national credit ratings for those securities.

There were no OTTI losses recorded during the three months ended March 31, 2021.

At March 31, 2022, the Company held one U.S.

There were no OTTI losses recorded during the six months ended June 30, 2021.

At June 30, 2022, the Company held one U.S.

Treasury securities which was in a loss position for less than 12 months.

At March 31, 2022, the Company held one U.S.

At June 30, 2022, the Company held one U.S.

Government agency security which was in a loss position for less than 12 months.

At March 31, 2022, the Company held 114 obligations of states and political subdivision securities of which 83 were in a loss position for less than 12 months and four have been in a loss position for more than 12 months.

At June 30, 2022, the Company held 98 obligations of states and political subdivision securities of which 86 were in a loss position for less than 12 months and ten have been in a loss position for more than 12 months.

The unrealized losses on the Company’s investments in obligations of states and political subdivision securities and corporate debt securities were caused by interest rate changes.

Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2022.

At March 31, 2022, the Company held 108 U.S.

Government sponsored entity and agency securities collateralized by residential mortgage obligations of which 33 were in a loss position for less than 12 months and ten have been in a loss position for more than 12 months.

At June 30, 2022, the Company held 88 U.S.

Government sponsored entity and agency securities collateralized by residential mortgage obligations of which 41 were in a loss position for less than 12 months and four have been in a loss position for more than 12 months.

The unrealized losses on the Company’s investments in U.S.

2 unchanged sentences

Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment.

Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability to hold and does not intend to sell, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2022.

At March 31, 2022, the Company had a total of 100 Private Label Mortgage and Asset Backed Securities (PLMABS).

73 of the PLMABS securities were in a loss position for less than 12 months and 13 have been in loss for more than 12 months at March 31, 2022.

Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold, and it is more likely than not that it will not be required to sell those investments until a recovery of fair value, which may be the maturity date, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2022.

At June 30, 2022, the Company had a total of 96 Private Label Mortgage and Asset Backed Securities (PLMABS).

80 of the PLMABS securities were in a loss position for less than 12 months and 11 have been in loss for more than 12 months at June 30, 2022.

The Company continues to monitor these securities for indications that declines in value, if any, may be other-than-temporary.

At March 31, 2022, the Company held 13 corporate debt securities of which 11 were in a loss position for less than 12 months.

At June 30, 2022, the Company held 13 corporate debt securities of which 11 were in a loss position for less than 12 months and one has been in a loss position for more than 12 months..

The unrealized loss on the Company’s investments in corporate debt security was caused by interest rate changes.

See Note 3 of the Notes to Consolidated Financial Statements (unaudited) included in this report for carrying values and estimated fair values of our investment securities portfolio.

Total gross loans decreased $27,069,000 or 2.61% to $1,012,042,000 as of March 31, 2022, compared to $1,039,111,000 as of December 31, 2021.

Total gross loans increased $96,853,000 or 9.32% to $1,135,964,000 as of June 30, 2022, compared to $1,039,111,000 as of December 31, 2021.

The following table sets forth information concerning the composition of our loan portfolio at the dates indicated:

Loan Type (Dollars in thousands) March 31, 2022 % of Total

Loan Type (Dollars in thousands) June 30, 2022 % of Total

Loans December 31, 2021 % of Total

15 unchanged sentences

Total loans $ 1,126,091 $ 1,029,511

As of March 31, 2022, in management’s judgment, a concentration of loans existed in commercial loans and loans collateralized by real estate, representing approximately 96.6% of total loans.

As of June 30, 2022, in management’s judgment, a concentration of loans existed in commercial loans and loans collateralized by real estate, representing approximately 96.9% of total loans.

This level of concentration of commercial loans and loans collateralized by real estate is consistent with 96.4% of total loans at December 31, 2021.

1 unchanged sentence

The Company does not engage in any sub-prime mortgage lending activities.

At March 31, 2022, loans acquired in the Folsom Lake Bank (FLB), Sierra Vista Bank (SVB) and Visalia Community Bank (VCB) acquisitions had a balance of $85,346,000, of which $2,006,000 were commercial loans, $77,280,000 were real estate loans, and $6,060,000 were consumer loans.

At June 30, 2022, loans acquired in the Folsom Lake Bank (FLB), Sierra Vista Bank (SVB) and Visalia Community Bank (VCB) acquisitions had a balance of $79,386,000, of which $1,944,000 were commercial loans, $71,874,000 were real estate loans, and $5,568,000 were consumer loans.

At December 31, 2021, loans acquired in the FLB, SVB and VCB acquisitions had a balance of $93,201,000, of which $2,111,000 were commercial loans, $83,128,000 were real estate loans, and $7,962,000 were consumer loans.

2 unchanged sentences

Contributing to the commercial and industrial loan decrease was the forgiveness of PPP loans.

As of March 31, 2022, gross loans included $3,554,000 in PPP loans which are fully guaranteed by the SBA as compared to $18,553,000.00 at December 31, 2021 .

As of June 30, 2022, gross loans included $1,137,000 in PPP loans which are fully guaranteed by the SBA as compared to $18,553,000.00 at December 31, 2021.

The Board of Directors review and approve concentration limits and exceptions to limitations of concentration are reported to the Board of Directors at least quarterly.

2 unchanged sentences

Nonperforming loans are those loans which have (i) been placed on nonaccrual status;

(ii) been classified as doubtful under our asset classification system;

(ii) been classified as doubtful under our

asset classification system;

or (iii) become contractually past due 90 days or more with respect to principal or interest and have not been restructured or otherwise placed on nonaccrual status.

2 unchanged sentences

or (iii) principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection.

At March 31, 2022, total nonperforming assets totaled $292,000, or 0.01% of total assets, compared to $946,000, or 0.04% of total assets at December 31, 2021.

Total nonperforming assets at March 31, 2022, included nonaccrual loans totaling $292,000, no OREO, and no other repossessed assets.

At June 30, 2022, total nonperforming assets totaled $271,000, or 0.01% of total assets, compared to $946,000, or 0.04% of total assets at December 31, 2021.

Total nonperforming assets at June 30, 2022, included nonaccrual loans totaling $271,000, no OREO, and no other repossessed assets.

Nonperforming assets at December 31, 2021 consisted of $946,000 in nonaccrual loans, no OREO, and no other repossessed assets.

At March 31, 2022 and December 31, 2021, we had no loan considered to be a troubled debt restructuring (“TDRs”) included in nonaccrual loans.

A summary of nonperforming loans at March 31, 2022 and December 31, 2021 is set forth below.

The Company had no loans past due more than 90 days and still accruing interest at March 31, 2022 or at December 31, 2021.

At June 30, 2022 and December 31, 2021, we had no loan considered to be a troubled debt restructuring (“TDRs”) included in nonaccrual loans.

A summary of nonperforming loans at June 30, 2022 and December 31, 2021 is set forth below.

The Company had no loans past due more than 90 days and still accruing interest at June 30, 2022 or at December 31, 2021.

Management can give no assurance that nonaccrual and other nonperforming loans will not increase in the future.

Composition of Nonperforming Loans

(In thousands) March 31, 2022 December 31, 2021

(In thousands) June 30, 2022 December 31, 2021

Nonaccrual loans:

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We measure our impaired loans by using the fair value of the collateral if the loan is collateral dependent and the present value of the expected future cash flows discounted at the loan’s original contractual interest rate if the loan is not collateral dependent.

As of March 31, 2022 and December 31, 2021, we had impaired loans totaling $3,759,000 and $8,586,000, respectively.

As of June 30, 2022 and December 31, 2021, we had impaired loans totaling $3,447,000 and $8,586,000, respectively.

For collateral dependent loans secured by real estate, we obtain external valuations which are updated at least annually to determine the fair value of the collateral, and we record a charge-off for the difference between the book value of the loan and the appraised value less selling costs value of the collateral, unless there is an extenuating circumstance that may positively affect the amount collected.

2 unchanged sentences

The following table provides a reconciliation of the change in nonaccrual loans for the first three months of 2022.

The following table provides a reconciliation of the change in nonaccrual loans for the first six months of 2022.

(In thousands) Balance, December 31, 2021 Additions

4 unchanged sentences

Status Charge-

Offs Balance, March 31, 2022

Offs Balance, June 30, 2022

Nonaccrual loans:

4 unchanged sentences

OREO is initially recorded at fair value less costs to sell and thereafter carried at the lower of cost or fair value, less selling costs.

We had no OREO properties at March 31, 2022 or December 31, 2021.

The Company held no repossessed assets at March 31, 2022 or December 31, 2021.

We had no OREO properties at June 30, 2022 or December 31, 2021.

The Company held no repossessed assets at June 30, 2022 or December 31, 2021.

Allowance for Credit Losses

1 unchanged sentence

The methodology is set forth in a formal policy and takes into consideration the need for an overall allowance for credit losses as well as specific allowances that are tied to individual loans.

The allowance for credit losses is an

estimate of probable incurred credit losses in the Company’s loan portfolio.

The allowance for credit losses is an estimate of probable incurred credit losses in the Company’s loan portfolio.

The allowance consists of two primary components, specific reserves related to impaired loans and general reserves for probable incurred losses related to loans that are not impaired.

17 unchanged sentences

The following table sets forth information regarding our allowance for credit losses at the dates and for the periods indicated:

For the Three Months

Ended March 31, For the Year Ended

December 31, For the Three Months

Ended March 31,

For the Six Months

Ended June 30, For the Year Ended

December 31, For the Six Months

Ended June 30,

(Dollars in thousands) 2022 2021 2021

13 unchanged sentences

At the onset of COVID we established a dedicated qualitative factor to address the lagging effect on our quantitative data.

We have materially reduced that factor’s impact on the ALLL given the passage of time and improving

economic conditions from mid-2020.

We have materially reduced that factor’s impact on the ALLL given the passage of time and improving economic conditions from mid-2020.

Although the allowance for credit losses is allocated to various portfolio categories, it is general in nature and available for the loan portfolio in its entirety.

1 unchanged sentence

Additions are also required when, in management’s judgment, the reserve does not properly reflect the potential loss exposure.

As of March 31, 2022, the balance in the allowance for credit losses (ALLL) was $9,864,000 compared to $9,600,000 as of December 31, 2021.

The increase is attributed to the net recoveries durin g the three months ended March 31, 2022.

The balance of undisbursed commitments to extend credit on construction and other loans and letters of credit was $346,752,000 as of March 31, 2022, compared to $326,108,000 as of December 31, 2021.

At March 31, 2022 and December 31, 2021, the balance of a contingent allocation for probable loan loss experience on unfunded obligations was $115,000.

As of June 30, 2022, the balance in the allowance for credit losses (ALLL) was $9,873,000 compared to $9,600,000 as of December 31, 2021.

The increase is attributed to the net recoveries durin g the six months ended June 30, 2022.

The balance of undisbursed commitments to extend credit on construction and other loans and letters of credit was $325,400,000 as of June 30, 2022, compared to $326,108,000 as of December 31, 2021.

At June 30, 2022 and December 31, 2021, the balance of a contingent allocation for probable loan loss experience on unfunded obligations was $115,000.

The contingent allocation for probable loan loss experience on unfunded obligations is calculated by management using appropriate, systematic, and consistently applied processes.

While related to credit losses, this allocation is not a part of the ALLL and is considered separately as a liability for accounting and regulatory reporting purposes.

As of March 31, 2022, the ALLL was 0.97% of total gross loans compared to 0.92% as of December 31, 2021.

Total loans include FLB, SVB and VCB loans that were recorded at fair value in connection with the acquisitions, with values of $85,346,000 at March 31, 2022 and $93,201,000 at December 31, 2021.

Excluding these FLB, SVB and VCB loans from the calculation, the ALLL to total gross loans was 1.06% and 1.01% at March 31, 2022 and December 31, 2021, respectively and general reserves associated with non-impaired loans to total non-impaired loans was 1.01% and 0.98%, respectively.

As of March 31, 2022, gross loans included $3,554,000 related to PPP loans which are fully guaranteed by the SBA as compared to $18,553,000.00 at December 31, 2021.

Excluding PPP loans and the acquired loans from the calculation, the allowance for credit losses to total gross loans was 1.07% and 1.04% as of March 31, 2022 and December 31, 2021, respectively.

The Company believes the allowance for credit losses is adequate to provide for probable incurred credit losses within the loan portfolio at March 31, 2022.

As of June 30, 2022, the ALLL was 0.87% of total gross loans compared to 0.92% as of December 31, 2021.

Total loans include FLB, SVB and VCB loans that were recorded at fair value in connection with the acquisitions, with values of $79,386,000 at June 30, 2022 and $93,201,000 at December 31, 2021.

Excluding these FLB, SVB and VCB loans from the calculation, the ALLL to total gross loans was 0.93% and 1.01% at June 30, 2022 and December 31, 2021, respectively and general reserves associated with non-impaired loans to total non-impaired loans was 0.89% and 0.98%, respectively.

As of June 30, 2022, gross loans included $1,137,000 related to PPP loans which are fully guaranteed by the SBA as compared to $18,553,000.00 at December 31, 2021.

Excluding PPP loans and the acquired loans from the calculation, the allowance for credit losses to total gross loans was 0.94% and 1.04% as of June 30, 2022 and December 31, 2021, respectively.

The Company believes the allowance for credit losses is adequate to provide for probable incurred credit losses within the loan portfolio at June 30, 2022.

The loan portfolios acquired in the mergers were booked at fair value with no associated allocation in the ALLL.

The size of the fair value discount remains adequate for all non-impaired acquired loans.

The Company’s loan portfolio balances for the three months ended March 31, 2022 decreased.

The Company’s loan portfolio balances for the six months ended June 30, 2022 increased.

Management believes that the change in the allowance for credit losses to total loans ratio is directionally consistent with the composition of loans and the level of nonperforming and classified loans, and by the general economic conditions experienced in the central California communities serviced by the Company, partially offset by recent improvements in real estate collateral values.

2 unchanged sentences

However, the total reserve rates on non-impaired loans include qualitative factors which are systematically derived and consistently applied to reflect conservatively estimated losses from loss contingencies at the date of the financial statements.

Based on the above considerations and given recent changes in historical charge-off rates included in the ALLL modeling and the changes in other factors, management determined that the ALLL was appropriate as of March 31, 2022.

However, no assurance can be given that the Company may not sustain charge-offs which are in excess of the allowance in any given period.

The following table illustrates and sets forth additional analysis which portrays the trends that are occurring in the loan portfolio.

March 31, 2022 December 31, 2021 March 31, 2021

June 30, 2022 December 31, 2021 June 30, 2021

(Dollars in thousands) Balance % to Total Loans Balance % to Total Loans Balance % to Total Loans

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Business combinations involving the Company’s acquisition of the equity interests or net assets of another enterprise give rise to goodwill.

Total goodwill at March 31, 2022, was $53,777,000 consisting of $8,934,000, $14,643,000, $6,340,000, $10,394,000, and $13,466,000 representing the excess of the cost of Bank of Madera County, Service 1st Bancorp, Visalia Community Bank, Sierra Vista Bank, and Folsom Lake Bank, respectively, over the net of the amounts assigned to assets acquired and liabilities assumed in the transactions accounted for under the purchase method of accounting.

Total goodwill at June 30, 2022, was $53,777,000 consisting of $8,934,000, $14,643,000, $6,340,000, $10,394,000, and $13,466,000 representing the excess of the cost of Bank of Madera County, Service 1st Bancorp, Visalia Community Bank, Sierra Vista Bank, and Folsom Lake Bank, respectively, over the net of the amounts assigned to assets acquired and liabilities assumed in the transactions accounted for under the purchase method of accounting.

The value of goodwill is ultimately derived from the Company’s ability to generate net earnings after the acquisitions and is not deductible for tax purposes.

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Core deposit intangibles are being amortized using the straight-line method (which approximates the effective interest method) over estimated lives of five to 10 years from the date of acquisition.

The carrying value of intangible assets at March 31, 2022 was $382,000, net of $2,862,000 in accumulated amortization expense.

The carrying value of intangible assets at June 30, 2022 was $242,000, net of $3,002,000 in accumulated amortization expense.

The carrying value at December 31, 2021 was $522,000, net of $3,230,000 accumulated amortization expense.

We evaluate the remaining useful lives quarterly to determine whether events or circumstances warrant a revision to the remaining periods of amortization.

Based on the evaluation, no changes to the remaining useful lives was required in the first three months of 2022.

Amortization expense recognized was $140,000 and $174,000 for the three months ended March 31, 2022 and March 31, 2021, respectively.

Based on the evaluation, no changes to the remaining useful lives was required in the first six months of 2022.

Amortization expense recognized was $280,000 and $347,000 for the six months ended June 30, 2022 and June 30, 2021, respectively.

The following table summarizes the Company’s estimated remaining core deposit intangible amortization expense for each of the next two years (in thousands):

3 unchanged sentences

All of a depositor’s accounts at an insured depository institution, including all non-interest bearing transactions accounts, are insured by the FDIC up to standard maximum deposit insurance amount of $250,000 for each deposit insurance ownership category.

Total deposits increased $39,563,000 or 1.86% to $2,162,360,000 as of March 31, 2022, compared to $2,122,797,000 as of December 31, 2021.

Interest-bearing deposits increased $77,080,000 or 6.65% to $1,236,293,000 as of March 31, 2022, compared to $1,159,213,000 as of December 31, 2021.

Non-interest bearing deposits decreased $37,517,000 or 3.89% to $926,067,000 as of March 31, 2022, compared to $963,584,000 as of December 31, 2021.

Average non-interest bearing deposits to average total deposits was 43.77% for the three months ended March 31, 2022 compared to 46.39% for the same period in 2021.

The Company’s deposit balances for the three months ended March 31, 2022 increased through organic growth and PPP loan proceeds retained in customer deposit accounts.

The composition of the deposits and average interest rates paid at March 31, 2022 and December 31, 2021 is summarized in the table below.

(Dollars in thousands) March 31, 2022 % of

Total deposits decreased $16,800,000 or 0.79% to $2,105,997,000 as of June 30, 2022, compared to $2,122,797,000 as of December 31, 2021.

Interest-bearing deposits increased $15,627,000 or 1.35% to $1,174,840,000 as of June 30, 2022, compared to $1,159,213,000 as of December 31, 2021.

Non-interest bearing deposits decreased $32,427,000 or 3.37% to $931,157,000 as of June 30, 2022, compared to $963,584,000 as of December 31, 2021.

Average non-interest bearing deposits to average total deposits was 43.85% for the six months ended June 30, 2022 compared to 46.11% for the same period in 2021.

The Company’s deposit balances for the six months ended June 30, 2022 increased through organic growth and PPP loan proceeds retained in customer deposit accounts.

The composition of the deposits and average interest rates paid at June 30, 2022 and December 31, 2021 is summarized in the table below.

(Dollars in thousands) June 30, 2022 % of

Deposits Average Effective

9 unchanged sentences

Other Borrowings

As of March 31, 2022 and December 31, 2021, the Company had no Federal Home Loan Bank (“FHLB”) of San Francisco advances.

As of June 30, 2022 and December 31, 2021, the Company had $9,324,000 Federal Home Loan Bank (“FHLB”) of San Francisco advances.

We maintain a line of credit with the FHLB collateralized by government securities and loans.

6 unchanged sentences

The Company needs to maintain substantial levels of regulatory capital to give it maximum flexibility in the changing regulatory environment and to respond to changes in the market and economic conditions.

Our shareholders’ equity was $191,660,000 at March 31, 2022, compared to $247,845,000 at December 31, 2021.

The decrease from December 31, 2021 in shareholders’ equity is the result of an increase in retained earnings from net income of $6,086,000, the exercise of stock options of $132,000, stock issued under the employee stock purchase plan of $57,000, the effect of share-based compensation expense of $97,000, and stock awarded to employees of $273,000, offset by a decrease in accumulated other comprehensive income (AOCI) of $56,919,000, common stock cash dividends of $1,425,000, and stock repurchases of $4,486,000.

Our shareholders’ equity was $170,253,000 at June 30, 2022, compared to $247,845,000 at December 31, 2021.

The decrease from December 31, 2021 in shareholders’ equity is the result of a decrease in accumulated other comprehensive income (AOCI) of $81,551,000, common stock cash dividends of $2,824,000, and stock repurchases of $6,814,000, offset by an increase in retained earnings from net income of $12,628,000, the exercise of stock options of $399,000, stock issued under the employee stock purchase plan of $110,000, the effect of share-based compensation expense of $181,000, and stock awarded to employees of $279,000.

On November 17, 2021, the Board of Directors of the Company approved the adoption of a program to effect repurchases of the Company’s common stock with the intent to purchase up to $15 million worth of the Company’s outstanding common stock, or approximately 702,576 shares.

During the year ended December 31, 2021, the Company repurchased and retired 76,613 shares at an approximate average cost of $21.10 per share.

During the three months ended March 31, 2022, the Company repurchased and retired 195,873 shares at an average cost of $22.87 or $4,486,000.

During the first three months of 2022, the Company declared and paid $1,425,000 in cash dividends ($0.12 per common share) to holders of common stock.

During the six months ended June 30, 2022, the Company repurchased and retired 300,761 shares at an average cost of $22.63 or $6,814,000.

During the first six months of 2022, the Company declared and paid $2,824,000 in cash dividends ($0.24 per common share) to holders of common stock.

The Company declared and paid a total of $5,757,000 in cash dividends ($0.47 per common share) to holders of common stock during the year ended December 31, 2021.

7 unchanged sentences

credit and recourse arrangements, which are reported as off-balance-sheet items.

The following table presents the Company’s regulatory capital r atios as of March 31, 2022 and December 31, 2021.

The following table presents the Company’s regulatory capital r atios as of June 30, 2022 and December 31, 2021.

(Dollars in thousands)

March 31, 2022 Amount Ratio

June 30, 2022 Amount Ratio

Tier 1 Leverage Ratio $ 193,227 7.89 %

7 unchanged sentences

Total Risk-Based Capital Ratio $ 233,034 15.80 %

The following table presents the Bank’s regulatory capital ratios as of March 31, 2022 and December 31, 2021.

The following table presents the Bank’s regulatory capital ratios as of June 30, 2022 and December 31, 2021.

(Dollars in thousands) Actual Ratio Minimum regulatory requirement (1) Minimum requirement for “ Well-Capitalized ”

March 31, 2022 Amount Ratio Amount Ratio Amount Ratio

June 30, 2022 Amount Ratio Amount Ratio Amount Ratio

Tier 1 Leverage Ratio $ 222,959 9.10 % $ 97,953 4.00 % $ 122,442 5.00 %

11 unchanged sentences

Under applicable regulatory guidance, the amount of trust preferred securities that is eligible as Tier 1 capital is limited to 25% of the Company’s Tier 1 capital on a pro forma basis.

At March 31, 2022, all of the trust preferred securities that have been issued qualify as Tier 1 capital.

At June 30, 2022, all of the trust preferred securities that have been issued qualify as Tier 1 capital.

The trust preferred securities mature on October 7, 2036, are redeemable at the Company’s option beginning five years after issuance, and require quarterly distributions by the Trust to the holder of the trust preferred securities at a variable interest rate which will adjust quarterly to equal the three month LIBOR plus 1.60%.

9 unchanged sentences

For each January 7, April 7, July 7 or October 7 of each year, the rate will be adjusted to equal the three month LIBOR plus 1.60%.

As of March 31, 2022, the rate was 1.84%.

As of June 30, 2022, the rate was 2.64%.

On November 12, 2021, the Company completed a private placement of $35.0 million aggregate principal amount of its fixed-to-floating rate subordinated notes (“Subordinated Debt”) due December 1, 2031.

7 unchanged sentences

Our primary sources of liquidity are derived from financing activities which include the acceptance of customer and, to a lesser extent, broker deposits, Federal funds facilities with correspondent banks, and advances from the Federal Home Loan Bank of San Francisco.

These funding sources are augmented by payments of principal and interest on loans, the routine maturities and pay downs of securities from the securities portfolio, the stability of our core deposits and the ability to sell

investment securities.

As of March 31, 2022, the Company had unpledged securities totaling $944,873,000 available as a secondary source of liquidity and total cash and cash equivalents of $88,837,000.

Cash and cash equivalents at March 31, 2022 decreased 45.65% compared to $163,467,000 at December 31, 2021.

As of June 30, 2022, the Company had unpledged securities totaling $838,154,000 available as a secondary source of liquidity and total cash and cash equivalents of $27,233,000.

Cash and cash equivalents at June 30, 2022 decreased 83.34% compared to $163,467,000 at December 31, 2021.

Primary uses of funds include withdrawal of and interest payments on deposits, originations and purchases of loans, purchases of investment securities, and payment of operating expenses.

As a means of augmenting our liquidity, we have established federal funds lines with our correspondent banks.

At March 31, 2022, our available borrowing capacity includes approximately $110,000,000 in unsecured credit lines with our correspondent banks, $284,114,000 in unused FHLB secured advances and a $8,845,000 secured credit line at the Federal Reserve Bank.

At June 30, 2022, our available borrowing capacity includes approximately $110,000,000 in unsecured credit lines with our correspondent banks, $260,052,000 in unused FHLB secured advances and a $5,376,000 secured credit line at the Federal Reserve Bank.

We believe our liquidity sources to be stable and adequate.

At March 31, 2022, we were not aware of any information that was reasonably likely to have a material effect on our liquidity position.

The following table reflects the Company’s credit lines, balances outstanding, and pledged collateral at March 31, 2022 and December 31, 2021:

Credit Lines (In thousands) March 31, 2022 December 31, 2021

At June 30, 2022, we were not aware of any information that was reasonably likely to have a material effect on our liquidity position.

The following table reflects the Company’s credit lines, balances outstanding, and pledged collateral at June 30, 2022 and December 31, 2021:

Credit Lines (In thousands) June 30, 2022 December 31, 2021

Unsecured Credit Lines

16 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis